Last Thursday, when journalists questioned Finance Minister P Chidambaram about the rising inflation rate in the country, he quipped: 'Thank God, it's not Friday.'
Yes, indeed, there was no need for Chidambaram to comment on the inflation rate on Thursday, because in India inflation is calculated and announced on Fridays.
How is inflation calculated in India? Why is it announced on Fridays? And how do other countries calculate inflation? Read on . . .
- 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.
- 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.
- 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.
- 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.
- Some economists argue that it is high time that India abandoned WPI and adopted CPI to calculate inflation.
- 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.
- 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.
- 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.
- 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. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
- 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.
- The WPI is published on a weekly basis and the CPI, on a monthly basis. And in India, inflation is calculated on a weekly basis and announced on every Friday.
