WPI & CPI

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    Wholesale Price Index(WPI)

    The Wholesale Price Index (WPI ) isthe price of a representative basket ofwholesale goods.

    India uses WPI changes as a centralmeasure of inflation.The Wholesale Price Index focuses onthe price of goods traded betweencorporations, rather than goods boughtby consumers.The Indian WPI figure is released

    weekly on every Thursday and

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    Wholesale Price Index(WPI)

    WPI is the index that is used to measurethe change in the average price level ofgoods traded in wholesale market.The purpose of the WPI is to monitorprice movements that reflect supply anddemand in industry, manufacturing and

    construction.

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    The 100-point index issubdivided into threegroups.The primary articles,which include food

    and non-foodagriculture products,have a weight of22.02% in the index.Manufactured goodshave the highestweight of 63.75%.Fuel and poweraccount for 14.23%.

    22%

    64%

    14%

    Group of ItemsPrimary ManufacturedFuel & Power

    Items in the WPI

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    Calculation of WPIThe wholesale price index (WPI) is calculatedbased on the wholesale price of a few relevantcommodities.In India about 435 items were used for calculating

    the WPI in base year 1993-94.The advanced base year 2004-05, which uses 676items.The updated index will have 1,130 products,almost double the 676 items in the current index,and is likely to be launched after six months.

    A working group headed by Member, PlanningCommission, Saumitra Chaudhuri, has finalisedthe commodity basket with base year as 2009-10.

    Based on this individual movement, the WPI isdetermined through the averaging principle.

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    WPI - 175.4 in Jul

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    Simple WPICommodity Price in 1990

    (P 0)

    Base 1990

    =100

    Prices in

    2000(P 1)

    Price

    Relatives(R=P 1/ P 0 x100)

    N= X R

    PI in 2000 = R/N

    Weighted WPICommodity

    Weight(w)

    Price in1990 (P 0)

    Base1970 =100

    Prices in2000(P 1)

    PriceRelatives(R=P 1/ P 0 x100)

    W x R

    N= w R WRWeighted WPI in 2000 = WR/

    w

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    Why does the WPI needrevision?

    The WPI must reflect the consumptionpattern of people in order to truly reflect theprice rise.To be effective, the basket of commoditieswhose prices are tracked must be relevant.For instance, not many people were usingcellphones in 1993-94 but are using them

    extensively now.Similarly, consumption patterns changewith an increase in income. People spend

    more on clothes, recreation and holidays as

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    Why does the WPI needrevision?

    The main problem with WPI calculation isthat more than 100 out of the 435commodities included in the Index have

    ceased to be important from theconsumption point of view.The working group on WPI, headed byPlanning Commission member Abhijit Sen,has worked out a new index. The baseyear of the new index will be upgraded to2000-01. And the basket of commoditieswill be expanded to around 1,200 to reflectthe post-liberalisation consumption pattern.

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    Consumer Price Index(CPI)

    CPI is a statistical time-series measure of aweighted average of prices of a specifiedset of goods and services purchased byconsumers.

    It is a price index that tracks the prices of aspecified basket of consumer goods andservices, providing a measure of inflation.CPI is the official barometer of inflation in

    many countries such as the United States,the United Kingdom, Japan, France,Canada, Singapore and China.CPI for various population groups arecalculated and published by the Bureau ofLabour.

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    Purpose of CPITo measure the purchasing power by thedomestic currency i.e., rupee in IndiaTo regulate D.A. of employees in order tocompensate them for the rise in prices.To estimate the real income of a group for whichthe index is constructed.To determine economic policies relating to payscales, wages, HRA, taxation, etc.To compare the cost of living of cities, statesand regions of a country.

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    CPI Calculated in SeparateGroups

    The four CPI series are:CPI Urban Industrial Workers;CPI Urban Non-Manual Employees;CPI Agricultural labourers; andCPI Rural Labour

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    Consumer Price Index(CPI)

    The CPI (industrial workers) is based onchanges in prices at the retail level. Theindex, worked out by the ministry of

    labour, is used to measure the cost ofliving.There is an index for urban non-manual

    employees (CPI-UNME) too for whichthe base year is 1984-85 and An index for agricultural labours (CPI- AL) with base year 1986-87.

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    CPI CalculationTo construct the index for a given yearwith reference to a base year weneed

    a) Consumption basket in the base yearb) Prices of items in the basket in the basec) Price relatives for each item in the

    given yeard) From (a) & (b) we can get the weights

    W1 .. Wn

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    Laspeyres CPIItem Qty inbase

    year(q0)

    Pricesinbaseyear(p0)

    Prices incurrentyear(p1)

    Qty incurrentyear(q1)

    p0q0 p1q0 p1q1 p0q1

    p0q0 p1q0 p1q1

    p0q1

    L = ( p 1q0/ p 0q0) x 100WhereP0 - price in the base yearP1 price in the current yearQ0 quantity in the base yearQ1 - quantity in the current year

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    Parsches Method

    Parsches method= ( p 1q1/ p 0q1) x 100

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    2012 Inflation in India (CPI)inflation (monthly

    basis) inflationinflation (yearlybasis) inflation

    january 2012 -december 2011 0.51 %

    january 2012 - january2011 5.32 %

    february 2012 - january 2012 0.51 %

    february 2012 -february 2011 7.57 %

    march 2012 -february 2012 1.00 %

    march 2012 - march2011 8.65 %

    april 2012 - march2012 1.99 % april 2012 - april 2011 10.22 %

    may 2012 - april

    20120.49 % may 2012 - may 2011 10.16 %

    june 2012 - may2012 0.97 % june 2012 - june 2011 10.05 %

    july 2012 - june 2012 1.92 % july 2012 - july 2011 9.84 %

    august 2012 - july

    20120.94 % august 2012 - august

    201110.31 %