Erroneous Calculation of Inflation

Rising Inflation was the most ticklish question that gave nightmares to Man Mohan Singh Government. But were the prices of essential commodities actually rising?

While preparing for the test of Macroeconomics, I came to know that almost all the developed countries like USA, UK, China, Japan use CPI i.e., Consumer Price Index for calculating inflation whereas India uses Wholesale Price Index for calculating inflation. So, the method which is being used in our country for calculating persistent rise in the prices of general items over time (which we call as inflation) is erroneous.

The figures of inflation in dailies are not the true figures. They are distorted and manipulated not by the statisticians but by the very method which has been adopted to calculate them.

Let us have some general idea about CPI and WPI

Wholesale Price Index

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

Now the question arises how the inflation measurement by WPI is erroneous?

WPI as the name suggests is at the whole sale level and so, it does not measure the exact price rise which the end-consumer end up paying.

The second major problem with WPI calculation that more than 100 out of 435 items have lost their significance from consumption point of view.

e.g., the commodities like coarse grains which is generally used for cattle feed thereby having no significance continue to be there in the list which is used to measure inflation. Also, the services which have a lot of importance in our economy is not there in the list. Besides this, the list of commodities was last reviewed in 1993-1994 and today most of the commodities have become redundant in their use.

WPI gives us the essence of the business which we are taking as the nerve of the consumers while calculating price rise.

So, there is a high time need that India should shift from WPI to CPI for measuring inflation.

But is it possible in near future to shift to CPI from WPI for calculating inflation?

In India, we have four CPI indices

CPI UNME (Urban Non Manual Employees)

CPI AL (Agricultural Labour)

CPI RL (Rural Labour)

CPI IW (industrial Workers)

So, decision to choose which CPI index will be risky and unwieldy.

Second, important reason for which we are not using CPI is reported on monthly basis with a huge time lag whereas WPI is published weekly basis.

In India, inflation is calculated on weekly basis.