Rising inflation was the most recent ticklish political issue that hit the Manmohan Singh government. But was inflation rising because of price rise in essential commodities? Or was it because of the ‘erroneous method’ of calculating inflation? Some economists assert that
Economists V Shunmugam and D G Prasad working with India’s largest commodity bourse — the Multi Commodity Exchange — have come out with a research paper arguing that the government urgently needs to shift the method of calculating inflation.
Saying that there are serious flaws in the present method of calculating inflation, the paper
So how does
Most developed countries use the Consumer Price Index (CPI) to calculate inflation.
Wholesale Price Index (WPI)
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
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.
Economists Shunmugam and Prasad say it is high time that
"CPI is the official barometer of inflation in many countries such as the
It pointed out that 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 paper says 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.
Shunmugam says WPI is supposed to measure impact of prices on business. "But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy," he pointed out.
But why is
Finance ministry officials point out that there are many intricate problems from shifting from WPI to CPI model.
First of all, they say, in
Secondly, officials say the CPI cannot be used in
The WPI is published on a weekly basis and the CPI, on a monthly basis.
And in