1. What is inflation? Inflation is defined as a sustained increase in the general level of prices for goods and services Variation of Inflation Deflation Hyperinflation Stagflation Causes of Inflation Two generally accepted theories are: Demand-Pull Inflation : Too much money chasing too few goods Cost push inflation:When companies' costs go up, they need to increase prices to maintain their profit margins.
2. How inflation is Calculated? Wholesale Price Index (WPI) WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index 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 prices 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 two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.
3. Consumer Price Index (CPI) CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.
4. India is the only major country that follows WPI for calculation of inflation . The main draw back in this process is that WPI will not measure the exact price rise an end consumer will experience, as it is whole sale level. The main problem with WPI calculation is that more than100 out of 435 commodities included in the Index have ceased to be important from the consumption point of view Take ,for example a commodity like coarse grains that go into making livestock feed. This commodity is significant , but continued to be considered while measuring inflation. India constituted the last WPI series of commodities in the year 1993-94 , but has not updated till now, hence can be argued that the index has lost its relevance and can not be barometer for inflation calculation.
5. Why India not shifting CPI for calculating Inflation? As per finance ministry official there are intricate problem for shifting WPI to CPI. Like there are four consumer price index CPI for industrial worker CPI for urbane non manual employees CPI agricultural laborers CPI for rural labor Also there are a lots of time lag in reporting. As on 21st May 2009 the latest CPI number reported is for March 2006.
7. Inflation in India dropped to negative market recently. For the first time in last 33 years the inflation rate turned to negative in India. Despite the negative inflation in India people have been feeling the pinch of the food price. Inflation rose marginally to (-)1.2% for the week ended July 4 against (-)1.55% in the previous week mainly due to higher prices of fuel items. The wholesale price index during the corresponding week a year ago was as high as 12.19%.
