INFLATION

What is Inflation

Inflation rate is the rate at which prices of goods and services increases in its economy it’s an indication of the rise in the general level of prices over time. Since its practically impossible to find out the average change in prices of all the goods and services traded in an economy due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate. Mathematically, inflation rate is calculated as the percentage rate of change of certain price index.

How does India Calculate Inflation

In India inflation is calculated on weekly basis. It uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. WPI was first published in 1902 and was one of the most reliable economic indicator available to policy makers until it was replaced by most developed countries by the Consumer Price Index(CPI) in the 1970s.

     WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in price of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only 2 weeks. The Indian Government has taken WPI as an indicator of the rate of inflation in the economy.  

 According to research paper of prominent economist the CPI is official barometer in many countries such as USA, UK, Japan, France, Canada, Singapore and China. The Government there review the commodity basket of CPI once in every 4-5 years to factor in changes in consumption pattern.

  The various research papers say the main problem with WPI calculation is more than 100 out of 435 commodities included in the index have ceased to be important from the consumption point of view. India constitutes the last WPI series of commodities in 1993-1994 but has not updated it till now due to this economist argue the index has lost relevance and cannot be a barometer to calculate inflation. 

  WPI is supposed to measure impact of price on business. But India uses it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the Index and it does not factor in services which has assumed so much importance in the economy. 

Why India is not switching to CPI Method of calculating inflation

There are many intricate problem from shifting from WPI to CPI model. India there are 4 different types of CPI indices  which makes switching over to CPI from WPI fairly "Risky and Unwieldy"the 4 CPI series are

1. CPI Industrial Workers

2. CPI Urban and Non Manual Employees

3. CPI Agricultural Labour

4. CPI Rural Labour 

The CPI cannot be used in India because there is too much time lag in reporting CPI numbers. The WPI is published on weekly basis and CPI on monthly basis.

What is Consumer Price Index

A Consumer Price Index (CPI) is a measure estimating the average price of consumer goods and services purchased by household. CPI measures a price change for a constant market basket of goods and services from one period to the next within same area (City, Region or Nation). Its a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. its one of several price indices calculated by most national agencies. The percent change in the CPI is a measure estimating Inflation. The CPI can be used to index wages, salaries, pension and regulated or contracted prices.
What are Myths of Inflation In India
Economist are of the view that there are 8 myths of inflation in India they are:-
1. Its all about Food Prices
2. The pick up in inflation is all due to base effects from last year's low inflation
3. Inflation will fall back to normal range on its own
4. Fresh capacity will come on-stream soon and alleviate constraints
5. Monetary tightening will kill the expansion
6. Administrative measures are as good as - or better than - monetary tightening to control  
    inflation
7. A stronger rupee does nothing to control inflation
8. Policy tightening will deny credit to small business and the common man as well as poor.