INFLATION CALCULATION

FACTORS CONSIDERED FOR CALCULATING INFLATION FIGURES

Here are some of the things that are used to Calculate the rate of inflation. The price changes in these things is taken as an indicator of inflation.

1. Consumer price indices (CPIs) : which measure the price of a selection of goods purchased by a "typical consumer".

2. Cost-of-living indices (COLI) : which often adjust fixed incomes and contractual incomes based on measures of goods and services price changes.

3. Producer price indices (PPIs) : which measure the price received by a producer.
This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any resulting increase in the CPI. Producer price inflation measures the pressure being put on producers by the costs of their raw materials.

4. Wholesale price indices :which measure the change in price of a selection of goods at wholesale, prior to retail mark ups and sales taxes. These are very similar to the Producer Price Indexes.

5. Commodity price indices : which measure the change in price of a selection of commodities.

IN INDIA WE USE WPI SYSTEM TO CALCULATE INFLATION AND FRESH FIGURES ARE FLASHED ON EVERY FRIDAY:

ANALYSIS OF WPI SYSTEM :

1. India uses the Wholesale Price Index (WPI) to calculate and then decide the rate of inflation in the economy. Most developed countries use the Consumer Price Index (CPI) to calculate inflation.

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

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

4. 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.

5. 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.

6.Some economists argue that it is high time that India abandoned WPI and adopted CPI to calculate inflation.

7.India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.

8.CPI is the official barometer of inflation in many countries such as the United States, the United Kingdom, Japan, France, Canada, Singapore and China. The governments there review the commodity basket of CPI every 4-5 years to factor in changes in consumption pattern.

9.WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level.

10.The main problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. By this commodity which is insignificant, but continues to be considered while measuring inflation.

11.India constituted the last WPI series of commodities in 1993-94; but has not updated it till now that economists argue the Index has lost relevance and can not be the barometer to calculate inflation.

12.The WPI is published on a weekly basis and the CPI, on a monthly basis. in India, inflation is calculated on a weekly basis and announced on every Friday.