Calculation of Inflation in India
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Calculation of Inflation in India

1. Consumer Price Index (CPI)

The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is the most commonly used measure of inflation in India.

Formula for CPI

CPI = (Cost of Market Basket in Current Year / Cost of Market Basket in Base Year) * 100

Example Calculation:

1. Base Year (2012): Cost of Market Basket = ₹500

2. Current Year (2023): Cost of Market Basket = ₹550

CPI (2023) = (550 / 500) * 100 = 110

Inflation Rate Using CPI

Inflation Rate = (CPI Current Year - CPI Previous Year) / CPI Previous Year * 100

Example:

1. CPI in 2022: 108

2. CPI in 2023: 110

Inflation Rate (2023) = (110 - 108) / 108 * 100 = 1.85%

2. Wholesale Price Index (WPI)

The WPI measures the average change in prices of goods at the wholesale level. It includes primary articles (like agricultural products), fuel and power, and manufactured products.

Formula for WPI

WPI = (Current Price of Basket / Base Year Price of Basket) * 100

Example Calculation:

1. Base Year (2012): Price of Basket = ₹100

2. Current Year (2023): Price of Basket = ₹120

WPI (2023) = (120 / 100) * 100 = 120

Inflation Rate Using WPI

WPI Inflation Rate = (WPI Current Year - WPI Previous Year) / WPI Previous Year * 100

Example:

1. WPI in 2022: 115

2. WPI in 2023: 120

WPI Inflation Rate (2023) = (120 - 115) / 115 * 100 = 4.35%

Sources of Data

The data for CPI and WPI is collected and published by various governmental agencies:

  • The Ministry of Statistics and Programme Implementation (MoSPI) publishes the CPI.
  • The Office of the Economic Adviser, Ministry of Commerce and Industry, publishes the WPI.

Visual Representation

Year Cost of Market Basket (₹) CPI CPI Inflation Rate (%) Price of Wholesale Basket (₹) WPI WPI Inflation Rate (%)
2021 500 100 - 100 100 -
2022 540 108 8.0 115 115 15.0
2023 550 110 1.85 120 120 4.35

Importance of Measuring Inflation

Accurate measurement of inflation is crucial for:

  • Economic policy formulation.
  • Adjusting income payments like wages and pensions.
  • Guiding investment decisions.

WPI and CPI in Inflation Measurement

Wholesale Price Index (WPI)

The Wholesale Price Index (WPI) measures the average change in the price of goods at the wholesale level, before they reach the retail level. It includes primary articles, fuel and power, and manufactured products.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It reflects the cost of living.

Differences Between WPI and CPI

  1. Scope:

    • WPI: Measures inflation at the wholesale level.
    • CPI: Measures inflation at the retail level.

  2. Coverage:

    • WPI: Covers primary articles, fuel and power, and manufactured products.
    • CPI: Focuses on consumer goods and services like food, housing, and transportation.

  3. Usage:

    • WPI: Used for monitoring price trends before products reach retail markets.
    • CPI: Used to adjust salaries, pensions, and social security payments based on cost of living.

Understanding WPI and CPI

Understanding the differences and uses of WPI and CPI is essential for analyzing inflation trends, formulating economic policies, and ensuring economic stability.