It is enjoyable to hear our parents and grandparents telling us about their childhood stories. About how they could buy ice-cream or sugar cane juice in just a couple of paisas. Or how their first salary was a couple of hundred rupees. Such stories may be their favourites, but this shows how much inflation has changed over the years.
Let us delve deeper into this economic phenomenon and understand how it affects the common man.
What is inflation?
Inflation is an economic indicator that shows the purchasing power of a country. It refers to the sustained increase in the prices of goods and services year after year.
If inflation occurs with a corresponding increase in peoples’ incomes, it is a good sign. However, if incomes do not increase, it affects the living situation of ordinary people. It can also lead to a stagnant economy.
Economists consider a standard 2-3% yearly inflation as a good thing. It results in higher incomes and corporate profits. It means there will be more capital to flow within the economy and create a positive ecosystem.
There are two ways to measure inflation - Wholesale Price Index (WPI) and the Consumer Price Index (CPI). Let us understand these indices in detail.
What is WPI?
As the name suggests, WPI refers to the price changes in the wholesale market. This index indicates the changing prices of goods and does not consider services. WPI is calculated considering three broad categories of commodities - primary goods, fuel and power and manufactured goods.
What is CPI?
CPI indicates the changing prices in the retail market and includes distribution costs and taxes. CPI is calculated after measuring the change in a basket of goods and services. This basket includes essential commodities like food, transportation, fuel, medical costs etc.
What is the difference between WPI and CPI?
CPI has three consumer categories - Industrial workers, agricultural labourers and rural labourers. Each class has its predefined basket as per the consumption pattern of the group. WPI has no such divisions.
The Office of Economic Adviser, Ministry of Commerce and Industry in India publish WPI data. The Labor Bureau of the Labor Ministry releases CPI data.
The base year for calculating WPI is 2004-05, and the basket contains 676 items. CPI base year is 2012 and has a broader basket with 908 items.
The critical use of WPI is to understand the inflationary pressures on the economy of any nation. CPI, on the other hand, is used to adjust incomes to align with the changing cost of living.
CPI includes only the consumer goods and services while WPI covers all intermediated products as well.
Which index does the RBI use?
Earlier RBI would consider WPI to decide its monetary policies. However, it looks at CPI and monitors the CPI index to set targets and arrive at policies.
CPI is the figure to track if you want to understand how the changing prices are affecting your wallet. You may consider monitoring WPI if you need to know to understand how the prices are changing in the wholesale market and may influence your business.