CPI ,WPI and its Relevance

Understanding Indexes

What is an index?An index is a composite of indicators that

produces a single calculation which can then be ranked.

Let’s look at some examples!!

Some Other Indexes..• The Economist’s “Quality of Life” Index• UNICEF’s “Child-Welfare” Index• The “Happy Planet” Index• The UNDP’s “Human Poverty Index”• The UNDP’s “

Gender Empowerment Measure”• International Living’s “Quality of Life” Index• The “Global Peace Index”• Freedom House’s “Freedom Rankings”

Economic & Social Indexes………………….

Economic and social indexes are like those we just referred to, except they include economic and social data (such as income, educational attainment, health, etc.)

Price indexAverage price movement for a fixed basket of

goods and services over a period of time

Price Index Measured at

Consumer Price Index Retail level

Wholesale Price Index Wholesale level

Producer Price index Producer level

CPI Weighted average of prices of a basket of

consumer goods and services

WPIAverage price level of goods traded in

wholesale market

Types of CPI CPI

Industrial workers

Urban non-manual

employees

Agricultural laborers

Items IW UNME AL

Food 57.0 47.1 69.2

Tobacco and Intoxicants

3.2 3.8

Fuel and Light 6.3 5.5 8.4

Clothing and Footwear

8.5 7.0 7.0

Housing 8.7 16.4 -

Miscellaneous 16.3 24.0 11.6

WPI Weights Description (1981-82)

series(1993-94)

series(2004-05)

series

Primary Articles

32.3 22.02 20.12

Fuel, Power, Light &

Lubricants

10.66 14.23 14.91

Manufactured Products

57.04 63.75 64.97

All Commodities

100 100 100

Finalization of Base YearThe price index of the base year is assumed as 100.

Criteria to be fulfilled-1. Normal year with no abnormalities in trade,

production. 2. Stable year without any political

disturbances, war, big natural calamities etc 3. The data for price level, price variation,

trade and production should be available4. Year should be recent possible and

comparable with other data series in national and state level.

Finalization of item Basket for WPI

Includes all important items transacted during the base year

Concentrates on goods sectors with different procedure for agricultural and non-agricultural items

Selection based on importance of the item. The final inclusion and exclusion is done after consulting with various departments

Calculation of CPI

Year Price of an Apple

Quantity of Apples

Price of Burger

Quantity of burger

2001 5 60 20 10

2009 10 140 40 40

2010 12 150 48 60

•Fixed quantity price index•Items are weighted as per percentage of income spent by households

CPI 2001 = 100CPI 2009 = 200CPI 2010 = 240

CPI- RECENT DEVELOPMENTSAS THE CPI TRACKS INFLATION AT THE

CONSUMER LEVEL, IT HAS BECOME THE KEY MEASURE OF

INFLATION USED BY THE RBI FOR ITS MONETARY POLICY ACTION.

THE CSO HAS SINCE REVISED THE BASKET OF ITEMS INCLUDED WHILE COMPUTING THE CPI.

THE NUMBER OF ITEMS HAS INCREASED FROM 437 TO 448 IN RURAL AREAS, &FROM 450 TO 460 IN URBAN AREAS.

CPI – RECENT DEVELOPMENTSMINERAL WATER, CHIPS, INTERNET

EXPENSES, HOTEL LODGING CHARGES, INVERTER,

AMONG OTHERS, HAVE BEEN MADE PART OF THE NEW CPI,WHICH HAS BEEN INTRODUCED IN FEBRUARY, 2015.

CPI – RECENT DEVELOPMENTSTHE WEIGHTS OF THE CATEGORIES ARE

DERIVED FROM 2011-12 NSSO HOUSEHOLD CONSUMER

EXPENDITURE SURVEY, AGAINST 2004-05 SURVEY IN THE

EXISTING SERIES.(SOURCE : THE ECONOMIC TIMES,

10/03/2015)

Calculation of WPILaspeyre’s formula ∑ (Pn / Po) X Wi

In = ------------------------------- X 100

∑ WiWhere In = CPI for nth periodPn = price of item in nth periodPo = price of item in base periodWi = weight of ith item in base period∑ Wi = total weight of all items

Calculation of WPIGroup WPI Weight WPI * Weight

Primary Articles

145.0 0.2012 29.17

Manufacturing Products

138.5 0.6497 89.98

Fuel, Power, Light and Lubricants

167.3 0.1491 24.94

Overall Weekly WPI

144.03

WPI-Trend

Uses of CPI To assess price changes associated with cost

of livingTax brackets to avoid increases in the rate of

taxes induced by inflationTo translate long term financial figures into

inflation free or adjusted valuesAlso used for calculating inflation in most of

the countries

Problems of CPIDoes not take into account quality

improvement

High base effect

Why WPI a measure of Inflation?WPI uses sample of 676 commodities for inflation

calculationPrice from wholesale market taken for the

calculationThe index is published weekly, with the shortest

possible time gap of only two weeksEasy for policy makers to take measure against

price rise before the commodity actually hits market

WPI measures inflation at each stage of production while CPI measures inflation only at final stage of production

Problems with WPIAll services not incorporated in WPI

calculation

WPI does not take into account retail margin

High base effect

THE GOVERNMENT OF INDIA HAS RECENTLY INTRODUCED A NEW SERIES & A NEW BASE YEAR FOR COMPUTING CPI/WPI

ReferencesRBILabor Bureau, Government of India

Thank You