• Inflation Measurement

    Inflation is measured by the Inflation Rate which is calculated based on the price increase of goods and articles over a period of time compared to price during the same period last year. Two widely used Inflation rates are WPI (Wholesale Price Index) and CPI (Consumer Price Index).

    Wholesale Price Index (WPI)

    The wholesale price index (WPI) is a widely used technique to measure the inflation over a period of time.Indiauses WPI for the measurement of inflation.

    Wholesale price index is formed by taking the wholesale price of all the necessary commodities and goods used by the typical households. The weight of each commodity and good is decided by the weight of their use among all the necessary articles and goods. The WPI is calculated every week based on the current wholesale price and weight of all the commodities. The weight of the contributing commodities is revised regularly and updated if needed.

    Indiauses WPI to calculate its inflation. It uses 2004-05 WPI value of 100 as the base for inflation calculation. The 2004-05 WPI base uses 676 commonly used items and articles.

    As per the Indian Ministry of Commerce and Industry data the article list is as follows with the weight.

     

    Sl No Articles/Products Weight
    1 Primary Articles 20.11815
    a Food Grains 4.08982
    b Fruits and Vegetables 3.8427
    c Milk 3.23818
    d Eggs, Meat and Fish 2.41384
    e Condiments and Spices 0.56908
    f Other Food Articles 0.18347
    g Non-Food Articles 4.25756
    h Minerals 1.5235
         
    2 Fuel and Power 14.91021
    a Coal 2.09419
    b Mineral Oils 9.36439
    c Electricity 3.45163
         
    3 Manufactured Products 64.97164
    a Food Products 9.97396
    b Beverages, Tobaco products 1.76247
    c Textiles 7.32639
    d Wood and Wood prodcuts 0.58744
    e Paper and paper products 2.0335
    f Leather Products 0.83509
    g Rubber and Plastic products 2.98697
    h Chemical products 12.0177
    i Non-metalic mineral products 2.55597
    j Basic Metals, alloys and metal products 10.74785
    k Machinery and Machine tools 8.93148
    l Transport, Equipment and Parts 5.21282
    Total 100

    Suppose in June 2010 the Indian WPI was 170 and in June 2011 the WPI rose to 185. The inflation in terms of WPI for June 2011 will be measured as

    ((185.00 – 170.00)/ 170.00) * 100% = 8.823%

    This means the Indian Inflation for June 2011 stood at 8.823%.

    Consumer Price Index (CPI)

    Consumer price index (CPI) is a widely used statistical measurement technique to measure the price level changes of regularly used consumer goods and serviced by the households (Inflation) over a period of time. The CPI is mainly used inUSAto measure inflation.

    In this process, first a consumer price index is constructed by using the price of sample consumer goods and services which are regularly used by the household. The percentage weight of different goods and articles in the main index are decided based on the expenditure pattern by the typical households in the country. If a typical household spends an average of 15% of their total expenditure in oil and gasoline, then oil and gasoline will have 15% weight in the consumer price index.

    The weight of different goods and articles is revised regularly and any change in the expense pattern is reflected in the revised consumer price index. Based on the current price and weight of all the contributing consumer goods and services the consumer price index is calculated every week.

    Suppose in June 2010 theUSconsumer price index was 150.00 and in June 2011 the consumer price index rose to 156.00. The inflation in terms of CPI for June 2011 will be measured as

    ((156.00 – 150.00)/ 150.00) * 100% = 4%

    This means theUSinflation for June 2011 stood at 4%.

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