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How is Inflation Measured? What is Inflation in India?

IndianMoney.com Research Team | Posted On Tuesday, December 24,2019, 02:52 PM

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How is Inflation Measured? What is Inflation in India?

 

 

As per the Ministry of Statistics and Programme Implementation, the inflation rate in India in the year 2019 is 6.70%. This figure is modest when compared to the previous annual figure of 9.6% in June 2011.

But, in the current year statistics reveal retail price inflation rate to 5.54% year on year in November 2019 from 4.62% in the previous month and compared with market expectations of 5.26%. This is the highest inflation rate since July 2016.

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How is Inflation Measured? What is Inflation in India?

Let’s delve deeper to understand how inflation in India is measured:

What is Inflation?

Inflation can be defined as the sustained increase in the general price level in an economy. It leads to an increase in the prices of goods and services and consequently results in an increase in the cost of living. Inflation is the imbalance between aggregate demand and aggregate supply of goods and services. It is important to keep the inflation level positive in an economy as deflation can have negative effects on it. An effective inflation rate ranges from 1% to 3% and it should persist in the form of creeping inflation.

See Also: How Inflation Destroys Your Investments?

What is Inflation in India?

The changes in CPI in India can be volatile as there are certain drawbacks to the economy. India’s dependence on oil imports, the impact of monsoon in agriculture, lack of roads and infrastructure and high fiscal deficit are important factors that impact the CPI.

The most important category in CPI is food and beverages accounting for 54% of the total weight followed by cereals and products, milk and products, vegetables, prepared meals, meat and fish and oils and fats. Miscellaneous items account for 28.32% consisting of transport and communication, health and education. Housing accounts for 10.07%, Fuel and light for 6.84%, Clothing and footwear for 6.53% and Pan, tobacco, and intoxicants for 2.38% of CPI.

See Also: All you need to know about Inflation in India

How is Inflation Measured?

Economies use inflation indices as an economic tool to measure the rate of inflation in the economy. These indices allow analysts to understand the economic trends and changes in the prices of products and services. There are several popular models of inflation index followed by economists throughout the world. They are:

  • CPI (consumer price index)
  • PPI (producer price index)
  • ECI (Employment cost index)
  • GDP deflator(Gross domestic product deflator)

There are two main sets of inflation indices used to measure the changes in the price level in India – Wholesale Price Index (WPI) and Consumer Price Index (CPI). The WPI was the main index used for the measurement of inflation until April 2014. Post this, the RBI adopted CPI as the key measure of inflation. Discussed below are the two main indices and their features:

See Also: How Inflation Destroys Your Money?

Wholesale Price Index:

As the name suggests, WPI is the method of measuring inflation by taking into consideration the wholesale price levels. It is a price quoted from wholesalers and is computed by the office of economic affairs, ministry of commerce and industries. Previously the WPI was published on a weekly basis, however, the practice was discontinued and now it is published on a monthly basis.

While calculating the WPI, a basket of 697 items is taken into consideration and inflation is computed based on 5482 price quotations. The items are further divided into three categories namely: 

Manufactured Products: This includes food products and non-food products and consists of 65% of the total weight.

Primary Articles: This includes food articles and non-food articles and minerals and consists of 20.1% of the total weight.

Fuel and Power: Consist of 14.9% of the total weight.

See Also: What are the Different Types of Inflation?

Consumer Price Index:

CPI is the most popular inflation index throughout the world. CPI tracks the retail inflation by quoting prices from retailers and computing inflation based on price quotations in the agricultural, rural and industrial sectors. Thus the CPI basket is broader than the WPI basket

CPI again can be further categorized into various categories. They are:

  • CPI combined
  • CPI for agricultural laborers
  • CPI for rural laborers
  • CPI for industrial workers

CPI measures inflation at the retail level, by collecting prices of sample goods every month. The idea is to track the prices of a basket of goods and compare them with the prices of some previous year, often referred to as the baseline year.

See Also: What Is Cost Inflation Index?

Measure Inflation:

When the prices of goods and services increase at a specific rate then it is known as inflation whereas when there is a decrease it is known as deflation. Let’s say the rate of rice a year ago was Rs. 20 per kilo a year ago and now it stands at Rs. 22 per kilo, then the rate of inflation in rice prices is 10%.

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