WAYS TO MEASURE INFLATION:

Consumer price index:

A measure that examines the weighted average of prices of a basket of
consumer and services, such as transportation, food and medical care. The CPI is
calculated by taking price changes for each item in the predetermined basket of
goods and averaging them; the goods are weighted according to their importance.
Changes in CPI are used to assess price changes associated with the cost of living.
The calculation involved in the estimation of CPI is quite rigorous. Various
categories and sub-categories have been made for classifying consumption items and
on the basis of consumer categories like urban or rural. Based on these indices and
sub-indices obtained, the final overall index of price is calculated mostly by national
statistical agencies. It is one of the most important statistics for an economy and is
generally based on the weighted average of the prices of commodities. It gives an
idea

of

the

cost

living.

Wholesale Price Index:

India is one of the few countries where the WPI is considered as the headline
inflation measure by the central bank. This preference over the CPI Is often explained
in terms of three criteria national coverage, timeliness of release (now only limited to
food products) and its availability in a disaggregate format. Of these criteria, only the
last one is uncontroversial the CPI numbers are not released to the public in the
detail available for the WPI. This however does not appear to be an insurmountable
problem to address, because the detailed data is collected; it is just not made public
with sufficient timeliness.

The Working Group for Revision of Wholesale Price Index Numbers

OEADIPP (2008) discussed the construction of a new weighting scheme. The report
pointed to the inherent difficulty of defining the concept of the universe of the WPI.
While in principle, the WPI should comprise all transactions at first point of bulk sale
in the domestic market, in practice, how to account for these transactions, and what
sources to use, are issues that remain open to interpretation. Furthermore, the
weighting could be based on the notion of value added, final demand or gross output.
The approach underlying WPI relies on two concepts gross value of output for
manufactured products and value of marketed surplus for agricultural products.

What is the difference between WPI and CPI inflation?

Whole-sale price index (WPI) and Consumer price index (CPI) are the two
primary measures of inflation. Before, proceeding to know the difference between the
two index measures for inflation, let us understand what an index signifies? An index
figure reflects the change in a set of associated variables over a time period and in a
particular direction. Thus, price index is reflective of the total change in price level
paid by a producer or consumer. In the Indian context, 5 national indices are

accounted for inflation measure that include WPI and other four CPI indices. WPI
index reflects average price changes of goods that are bought and sold in the
wholesale market. WPI in India is published by the Office of Economic Adviser,
Ministry of Commerce and Industry. Further, the data for WPI is monitored and
updated on a weekly basis taking into account all the 676 items that form the index.
The various commodities taken into consideration for computing the WPI can be
categorized into primary article, fuel and power, and manufactured goods.
Primary articles included for the computation of WPI include food articles,
non-food articles and minerals. In the fuel, power, light and lubricants, electricity,
coal mining and mineral oil are included. The manufactured goods category
encompasses food products; beverages, tobacco, and tobacco products; wood and
wood products, textiles; paper and paper products; basic metals and alloys; rubber
and rubber products and many others. An, important point to take note of is the whole
sale price index (WPI) does not includes the cost of services. Further, as WPI
accounts for changes in general price level of goods at wholesale level, it fails to
communicate actual burden borne by the end consumer.
WPI is the primary measure that is used by the Indian central government for
ascertaining inflation as WPI in contrast to CPI accounts for changes in price at an
early distribution stage. In contrast, CPI is computed by executing a weighted
average on a particular set of goods and services. The computation of CPI takes into
account price changes and the actual inflation that affects the end consumer. CPI is
thus a reflection of changes in the retail prices of specified goods and services over a
time

period

which

are

traded

by

particular

consumer.

Producer Price Indexes (PPI)

These are indices that measure the average change over time in selling prices
by producers of goods and services. They measure price change from the point of
view of the seller. Majority of OECD countries measure inflation based on Producer

Price Index (PPI) while only some others use WPI. Countries like Japan, Greece,
Norway and Turkey use WPI. Already WPI has been replaced in most of the
countries by PPI due to the broader coverage provided by the PPI in terms of
products and industries and the conceptual concordance between PPI and system the
national account.

PPI is considered to be more relevant and technically superior

compared to one at wholesale level. However, in India we are still continuing with
WPI.

Cost-of-living indices (COLI):

This is different from CPI.

This index aims to measure the effects of price

changes on the cost of achieving a constant standard of living (i.e. Level of utility or
welfare) as distinct from maintaining the purchasing power to buy a fixed
consumption basket of goods and services. Maintaining a constant standard of living
does not imply continuing to consume a fixed basket of goods and services. A COLI
allows for the fact that households who seek to maximize their welfare from a given
expenditure can benefit by adjusting their expenditure patterns to take account of
changing relative prices by substituting goods that have become relatively cheaper,
for goods that have become relatively dearer. The use or preference for a particular
good may also change.