TABLE OF CONTENTS
Measures of inflation
Measures of inflation in India
Calculation of WPI
New series of CPI
How Inflation is related with GDP?
Relationship between broad money supply and WPI/CPI
Announcement of hike in DA for government employees cause inflation? Impact of elections on inflation
Hypothesis testing for elections and inflation
An increase in the average level of prices of goods and services. Primarily, two types of price indices used are – Wholesale Price Index (WPI) and Consumer Price Index (CPI). Inflation measured through wholesale price index is called wholesale price inflation or headline inflation and inflation measured through consumer price index is called consumer price inflation. CONSUMER PRICE INDEX (CPI): It is more relevant to the consumer, since it measures changes in retail prices. The Consumer Price Index represents the basket of essential commodities purchased by the average consumer – food, fuel, lighting, housing, clothing, articles etc. Inflation measured by using CPI is called consumer price inflation. There are three measures of CPI, which track the cost of living of three different categories of consumers— Industrial workers (IW)
Agricultural laborers (AL)
Rural laborers (RL).
Each category has its own basket of commodities that represent the consumption pattern of the respective consumer groups. Not only does the basket of commodities differ, but also the weights assigned to the same commodity may be different under different CPI series. The chart below gives us a brief idea about the basket of commodities considered I weighing WPI and CPI(IW).
Here the graph shows the CPI series of rural labor, agricultural labor and industrial worker. Here the CPI agricultural and CPI rural are overlapped.
WHOLESALE PRICE INDEX
Inflation in India is measured commonly measured using wholesale price index. Wholesale price index is the representation of basket of goods .It represents the price index. The price index represents the average price movement over time of a fixed basket of goods and services. In India WPI was calculated from the year 1939. WPI is widely used in government, banks, and industry and business circles. Usually the compilation and publishing of WPI is done by ministry of commerce and industry. The current base year is 2004-2005. The WPI consisted of basket of good divided into 3categories. They are Primary Articles, Fuel and power and manufactured products. The price index was calculated as the geometric mean of the price evaluation of the commodities in the basket. The choice of the base year is chosen as the year in which no abnormalities are there in the level of production. The base year now chosen is 2004-2005 with a basket of 676 commodities.
WPI vs. CPI
FIG.1. WPI – CPI Comparison Here we are comparing WPI and CPI values from the year 2005 to 2012 and we reached a conclusion that in both WPI and CPI the rate of inflation is increasing. The gap between the WPI and CPI is because CPI includes the cost of services that is provided whereas WPI does not. The most important difference that CPI captures is that it does not include the service sector and 60% of the GDP is contributing to CPI and not to WPI. CPI for each individual will be different and therefore a huge gap arises between both. From this graph, It could be analyzed that the inflation rate in 2008-2010 is rising high because of recession occurrence in that year. Before 2008 there was a downward trend in the inflation rate. Because of this recession, the low and income countries showed a change from 7.51 to 21.85% and fats and oils from 9.14 to 30.08. In conclusion the...
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