Wpi, Cpi and Inflation: Presented By-Ishita Navneet Ekta C. Sanghvi Anish Kumar Goel Bagish Jha
Wpi, Cpi and Inflation: Presented By-Ishita Navneet Ekta C. Sanghvi Anish Kumar Goel Bagish Jha
Wpi, Cpi and Inflation: Presented By-Ishita Navneet Ekta C. Sanghvi Anish Kumar Goel Bagish Jha
PRESENTED BY-
ISHITA NAVNEET
EKTA C. SANGHVI
ANISH KUMAR GOEL
BAGISH JHA
Wholesale Price Index
• First published in 1902 – was the major
economic indicators available for the policy
makers, till the CPI came in 1970’s
• It measures the change in average price level of
goods traded in the wholesale market.
• In India price data for 435 commodities is
tracked by the WPI and it is an indicator of
movement in prices of commodities in all trades
and transactions.
• It is also the price index available on a weekly
basis- shortest possible time lag (2 weeks)
• ((B-A)/A)*100
• For ex. If the wholesale price index was 178 and today it is
185 then, the inflation would be 3.93% over the sample year
• Inflation in the overall food index (with a weight of 25.43 per cent in
the index) declined marginally to 7.5 per cent the latest week,
compared to 7.7 per cent last week, on account of fall in
manufactured food products.
• Mr Sajjan Jindal the President of another apex industry
body ASSOCHAM said reacting to the latest wholesale
price inflation figure released by the government, it was
heartening to note that it had slipped to 0.44% but its
reflection on primary food articles was yet to noticed
because the weightage of inflation on them was still
between 6% to 7%. He said that the reduced inflation
had shown its impact on prices of metals especially
copper, zinc, aluminium and even in steel and cement
and also manufactured goods whose prices had come
down.
Consumer Price Index
• A consumer price index (CPI) is a
measure of the average price of consumer
goods and services purchased by
households.
• It is a price index determined by measuring
the price of a standard group of goods
meant to represent the typical market
basket of a typical urban consumer.
• CPI is the official barometer of inflation in
many countries such as the United States,
the United Kingdom, Japan, France,
Canada,Singapore and China.
• The governments there review the
commodity basket of CPI every 4-5 years
to factor in changes in consumption
pattern.
• CPI is a measure of the overall cost of
goods and services bought by a typical
consumer.
• In the U.S. - The Bureau of Labor
Statistics reports the CPI each month.
• It is used to monitor changes in the cost of
living over time.
How is the Consumer Price Index
calculated?
• Fix the basket: determine what prices are
most important to the typical consumer.
• The Bureau of Labor Statistics (BLS)
identifies a market basket of goods and
services the typical consumer buys.
• BLS conducts monthly consumer surveys
to set the weights for the prices of those
goods and services.
• Find the prices: Find the prices of each of
the goods and services in the basket for
each point in time.
• Compute the basket’s cost: Use the
data on prices to calculate the cost of the
basket of goods and services at different
times.
• Choose a base year and compute the
index: Designate one year as the base
year, making it the benchmark against
which other years are compared.
• Compute the index by dividing the price of
the basket in one year by the price in the
base year and multiplying by 100.
• Compute the inflation rate - The
inflation rate is the percentage change in
the price index from the preceding period.
What is in the CPI’s basket?
Housing
4%
4% Transportation
6%
6% Food & Beverages
41%
6%
Education &
communication
17% Recreation
Apparel
Problems
• Substitution Bias:
• The bundle does not change in the short run to
reflect consumer reaction to changing relative
prices.
• Consumers substitute towards goods that have
become relatively less expensive.
• CPI is computed assuming a fixed basket of
goods.
• The index overstates the increase in cost of
living by not considering the substitution by the
consumer.
Continued..
• New Goods:
• The bundle does not reflect the effects of new
products that typically go down in price after
introduction.
• New products result in greater variety, which in
turn makes each dollar more valuable.
Consumers need fewer dollars to maintain any
given standard of living.
• The CPI is based on a fixed basket of goods and
does not reflect the change in the purchasing
power of the dollar.
Continued…
• Quality Changes:
• Higher market prices usually include quality
changes that do not necessarily represent a
higher cost of living.
• If the quality of a good decreases from one year
to the next, the value of a dollar falls (cost of
living rises), even if the price of the good stays
the same.
• If quality increases, the true cost of living may be
less even though some goods cost more.
CPI Indices in India