Measures of inflation

Measures of inflation

Reserve Bank governor D Subbarao has said that India needs a new measure of inflation — the producer price index. According to Subbarao, the most widely watched measure of inflation in India, the wholesale price index (WPI), does not include services, which forms a big part of economic activity. Let’s have a look at all the current inflation measures and their shortcomings and what the RBI wants: 

Wholesale Price Index

The WPI is the most widely watched gauge of prices in India, tracking commodity prices at the wholesale level. It has three major components: primary goods, fuel and power index and manufactured goods.

Primary goods carry a weight of 20.12%, ‘fuel and power’ 14.91% and manufactured products 64.97%.

1.   Not globally comparable as countries either have a producer price index or a consumer price index that is used by central banks.

2.   Has only goods, and excludes services, a huge part of the economy, which directly affects prices of all other things.

3.   Most of the prices are captured through mandis or places where wholesale transactions take place. These rates do not reflect the prices consumers pay for goods.

Consumer Price Index

India currently has four indices that measure changes in prices of goods and services paid by the final consumer.

They are: Consumer Price Index (CPI) for rural labourers, for agricultural labourers and for industrial workers, and (the latest) all-India consumer price index.

1.   The indices for rural labourers, agricultural labourers and industrial workers are too narrowly targeted to be used for macro-policy formulation.

2.   The all-India CPI, which has been divided between urban and rural areas, gives the most accurate picture of prices but has very limited history as it was started in January last year.

Producer Price Index

A producer price index (PPI) tracks the price of goods recorded at the first transaction. It measures changes in prices received by domestic producers of goods and services over time.

This is different from the retail prices, which include shipping costs, taxes and other levies. It gives an account of the economy’s efficiency in transferring goods and services from the producer to the consumer, who could be the final consumer or another producer using it as an input.

The government is in the process of creating a PPI, besides revising the WPI. The government plans to come out with both indices initially while moving to the PPI in time to establish congruity with internationally established standards.