What is inflation?
Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time, resulting in a decrease in the purchasing power of money. In other words, when inflation occurs, each unit of currency buys fewer goods and services compared to the past. It is often expressed as an annual percentage rate and can be caused by various factors, including:
- Demand-pull inflation: This occurs when the aggregate demand for goods and services in an economy surpasses the available supply, leading to upward pressure on prices.
- Cost-push inflation: This type of inflation arises when production costs, such as wages and raw materials, increase, causing businesses to pass these higher costs onto consumers through higher prices.
- Built-in inflation: Sometimes referred to as wage-price inflation, this is a self-perpetuating cycle in which workers demand higher wages to keep up with rising prices, and businesses then raise prices to cover the increased labor costs.
Inflation can have both positive and negative effects on an economy. Moderate inflation is often considered a sign of a healthy economy as it encourages consumer spending and investment. However, excessive inflation can lead to economic instability and reduced purchasing power, which can negatively impact savers, fixed-income earners, and people on fixed wages.
Central banks and governments closely monitor inflation rates and may use monetary and fiscal policies to try to control inflation and maintain price stability.
Inflation in India
Inflation in India is measured by the indices such as CPI and WPI
What is the Wholesale Price Index?
The Wholesale Price Index (WPI) is a measure of price changes for goods sold and traded in bulk by wholesale businesses to other businesses. It is published by the Office of Economic Adviser, Ministry of Commerce and Industry and is widely used as an inflation indicator in India.
However, it has faced criticism because it does not reflect the prices paid by the general public for retail purchases. In 2017, the base year of the All-India WPI was revised from 2004-05 to 2011-12.
What is the Consumer Price Index?
The Consumer Price Index (CPI) is another inflation measure that evaluates price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO) and considers the prices of commodities and services such as food, medical care, education, electronics, etc., which Indian consumers purchase for personal use. The CPI is categorized into several sub-groups, including food and beverages, fuel and light, housing, clothing, bedding, and footwear.
There are four types of CPI in India:
- CPI for Industrial Workers (IW)
- CPI for Agricultural Labourer (AL)
- CPI for Rural Labourer (RL)
- CPI (Rural/Urban/Combined)
The first three types are compiled by the Labour Bureau in the Ministry of Labour and Employment, while the fourth one is compiled by the NSO in the Ministry of Statistics and Programme Implementation.
The base year for the CPI is 2012, and recently, the Ministry of Labour and Employment introduced a new series of Consumer Price Index for Industrial Workers (CPI-IW) with the base year of 2016.
The Monetary Policy Committee (MPC) uses CPI data to control inflation, and since April 2014, the Reserve Bank of India (RBI) has adopted the CPI as its key measure of inflation.
| Aspect | Consumer Price Index (CPI) | Wholesale Price Index (WPI) |
| Purpose | Measures price changes from the perspective of retail buyers. | Measures changes in prices of goods sold and traded in bulk by wholesale businesses to other businesses. |
| Published by | National Statistical Office (NSO) | Office of Economic Adviser, Ministry of Commerce and Industry |
| Inflation Indicator | Widely used inflation indicator in India. | Also widely used as an inflation indicator in India. |
| Scope | Considers prices of commodities and services purchased for personal use by consumers. | Reflects price changes for goods sold in bulk by wholesalers to other businesses. |
| Criticism | – Provides a more accurate reflection of the cost of living for the general public. | – Does not directly represent prices paid by the general public for retail purchases. |
| Sub-groups | Includes various categories such as food and beverages, fuel and light, housing, clothing, bedding, and footwear. | Focuses on primary articles, fuel and power, and manufactured products. |
| Base Year | 2012 | 2011-12 |
| Compilation Entities | CPI (Rural/Urban/Combined), CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), and CPI for Rural Labourer (RL). | All-India WPI, and other specific WPIs for primary articles, fuel and power, and manufactured products. |
| Monitoring Inflation | Used by the Monetary Policy Committee (MPC) to control inflation. | Also used by policymakers to gauge inflation trends and make economic decisions. |
The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) serve as inflation indicators at the retail and manufacturing levels, respectively.
The ongoing debate between CPI and WPI has been a long-standing issue when it comes to selecting the most suitable metric for gauging inflation in an economy and for inflation targeting by the Reserve Bank of India (RBI).
Back in 2014, during Raghuram Rajan’s tenure as the Governor of RBI, CPI was chosen as the preferred inflation indicator for policymaking. In this article, we will explore the distinctive features of CPI and WPI that set them apart and allow them to portray inflation at different economic levels.
UPSC PYQ
- With reference to India, consider the following statements: (2010)
- The Wholesale Price Index (WPI) in India is available on a monthly basis only.
- As compared to Consumer Price Index for Industrial Workers (CPI(IW)), the WPI gives less weight to food articles.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Ans: (b)
- Consider the following statements: (2020)
- The weightage of food in the Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
- The WPI does not capture changes in the prices of services, which the CPI does.
- The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
Ans: (a)
