NMK, GCC | New Broader Price Index To Have 2004 05 As Base

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In any economy, generally two sets of factors result in inflation — Demand-pull factors and Cost-push factors. In India, the Ministry of Statistics and Programme Implementation measures inflation. Infrastructure bottlenecks which lead rise in production and distribution costs. There can be two set of factors that can cause inflation in an economy.

Oil prices up amid forecasts of 2023 demand uptickBrent crude futures rose $1.31, or 1.6%, to $81.99 per barrel by 1421 GMT, while U.S. West Texas Intermediate crude futures were up $1.41 at $76.80. The benefit of an economy to be able to produce a commodity at a lesser opportunity cost than other entities is referred to as comparative advantage. WPI is an easy and convenient method to calculate inflation. Inflation rate is the difference between WPI calculated at the beginning and the end of a year. The percentage increase in WPI over a year gives the rate of inflation for that year.

Another measure of inflation is the PPI, which reports the price changes which affect domestic producers. PPI measures prices for farm products such as meats and grains, fuel, chemical products, and metals. On the basis of items, the inflation indices are developed to understand the levels of inflation for certain sets/baskets of items. Since the prices of some items are more volatile than others like food and fuel, it might give conflicting signals to policymakers as the overall inflation could change because of a selected few goods.

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Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets. Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living. The key policy rates are Repo Rate, Reverse Repo Rate, Marginal Standing Facility and the key banking reserve requirements are SLR and CRR. Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. Disinflation is a temporary slowing of the pace of price inflation.

There is also a need to augment the new series of WPI with a service price index to improve its overall coverage. In addition, it would be desirable to initiate steps to develop a producer price index for the country. Moreover, the representativeness of the various price indices could be enhanced by frequent updation of the base year so that it reflects the structural change in the economy. Producer Price Index monitors the price changes in the production process. It monitors the average change in the selling prices that a producer receives for his goods and services. It measures the changes in the price of products and services sold to the final and the intermediate consumer.

Unfortunately, consumers receive little benefits from inflation, however. Investors get delighted and enjoy the boosts if they own assets in markets. For example, individuals who have invested in energy companies can see a rise in their stock prices if energy prices are rising. Few firms reap the rewards of inflation when they charge more for their products, resulting in higher demand for their goods. For example, suppose the economy is performing well and if the housing demand is high, the home-building companies may charge higher prices for selling homes. While the WPI measures price movement of goods in wholesale markets, the CPI tracks inflation at retail level and also includes certain services.

The most comprehensive measure is GDP deflator which is measured as the ratio of GDP at current prices to GDP at constant prices. Since it encompasses the entire spectrum of economic activities including services, the scope and coverage of the national income deflator is wider than any other measure. This data is released by the Central Statistical Organization internal growth rate but is not used as it comes quarterly and with a 2-month lag. The RBI controls the money supply by its monetary policy via which it alters the interest rates and alters the banking reserve requirements to bring the inflation in its comfort zone. Inflation measures the average price change in a basket of commodities and services over time.

It captures increase / decrease in “production”. Therefore, need to update list with based on technological changes, economic reforms and consumption patterns of the people. Basic GoodsAny bulk raw material/product used in manufacture. High Speed Diesel, Aviation Fuel, Kerosene, Urea, Cement all kinds, Granites, iron, copper and ElectricityCapital GoodsPlants, machinery and goods used for further investments.

It was earlier released on weekly basis for Primary Articles and Fuel Group. However, since 2012, this practice has been discontinued. When these rates are altered, the movements are passed on other prevailing interest rates in the economy which ultimately influences the borrowing costs for firms and households. RBI takes monetary measures while the Government takes fiscal measures to contain inflation.

WHY REVISE WPI, CPI, IIP series?

Does not include taxes in order to remove the impact of fiscal policy. This also brings new WPI series closer to the Producer Price Index and is in consonance with the global practices. So in this series of articles, we will be taking up the numerous economic jargon, one by one and try to simplify them for you. In India, however, data on CPI relates to different segments of the population rather than the entire population.

Inflation in a country such as India, with an estimated 300 million living in abject poverty, is a politically sensitive subject. All the more, because the government has not been able to put in place effective social safeguards, such as access to subsidized foodgrain through the public distribution system. Telecom SPIsonly for cellular services on the basis TRAI report. Quarterly basis.All of them use same Laspeyre’s formula. Railways SPIsfreight and passenger servicesBanking SPIsservices for which banks charge fees, commissions, brokerage, etc. Each IIP item should have certain minimum contribution to national production.

It is hence also called the cost of living index. It is also used for indexing dearness allowance to employees for increase in prices. Core inflation is also a term used to denote the extend of inflation in an economy. But Core inflation does not consider the inflation in food and fuel.

WHO calculates WPI, CPI, IIP?

Suggest methodology for adjusting prices of items with frequently changing specification. The reasons for the divergence between the two indices can also be partly attributed to the difference in the weight of food group in the two baskets. CPI Food group has a weight of 39.1 per cent as compared to the combined weight of 24.4 per cent in WPI basket. WPI is also used for the purpose of escalation clauses in the supply of raw materials, machinery and construction work. Business firms in search of effective methods for coping with changes in prices often employ price adjustment clauses in long-term sales and purchase contracts. The WPI based inflation estimates also serve as an important determinant, in formulation of trade, fiscal and other economic policies by the Government.

• All the more, because the government has not been able to put in place effective social safeguards, such as access to subsidized foodgrain through the public distribution system.
• As we have learned in the previous article – Inflation is sustained increase in price of basket of goods and services over a period of time.
• This will be especially beneficial for the students who are going to give their first attempt.
• All the four CPIs, which are biased towards food items, reported an average inflation of 6% at the end of October.
• Thus even significant price movements in items included in WPI basket need not necessarily translate into movements in CPI in the short run.

As a result, the actual price rise of a product would not be truly reported, until after the final data is submitted after eight weeks. Electricity, crude oil, coal, cement, steel, refinery products, natural https://1investing.in/ gas, and fertilizers are the eight core industries that comprise about 40 per cent of the weight of items included in the IIP. When inflation rises to 10% or more, it wreaks absolute havoc on the economy.

As a result, movement in international crude prices has a greater bearing on WPI than on the CPIs. Third, services are not covered under WPI while they are, to different degrees, covered under CPIs. Consequently, service price inflation has a greater influence on CPIs. The MPC might shy away from more rate hikes if inflation remains stubbornInflation was characterised as well above target and expected to moderate, but print above 4% over the next 12 months.

UPSC Practice Questions on Producer Price Index

The purpose of the PPI is to provide a measure of prices received by producers of commodities. The PPI usually covers the industrial sector as well as public utilities . Some countries also include agriculture, mining, transportation, and business services. Most of the countries replaced WPIs with PPIs in the 1970s and 1980s. For analytical purposes, it would be desirable to initiate the process of compilation of PPI for India.

GDP Deflator shows the change in prices of all goods and services over a particular period of time. It does not cover just some selected items which form the basket of other price indices. Thus even significant price rise or decline in items included in WPI basket need not necessarily translate into CPI in the short run. The rise or fall in prices at wholesale level spills over to the retail level after a lag. The divergence between alternative inflation measures complicates the conduct of monetary policy in India. That was slower than a 1.4% fall tipped in a Reuters poll.

Saumitra Chaudhuri Committee on WPI

Data released by the government showed that wholesale inflation in India rose to 13.11% while the retail inflation rate in India -measured by the Consumer Price Index - came in at 6.07% in February 2022. For these reasons, higher interest rates appear to be quite effective in slowing down consumers' investment and spending, leading to lower rates of economic growth. As economic growth slows down, even inflation tends to slow down as well. A sudden burst in production prices of certain items can even cause inflation as the price of the final product increases. Although inflation has its negative impacts, it's believed to a certain level that inflation is required because it ensures expenditure is promoted and accumulated money through savings is demotivated.