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MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP
Mrunalhttp://mrunal.org
[Economy]IndexTheory:WPI,CPI,IIP,Components,Baseyear
CorevsHeadlineinflation,Laspeyresformulaexplained
PostedByOn21/08/2014@3:39amInFiscalPolicy|59Comments
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Prologue
[Act1]WHOcalculatesWPI,CPI,IIP?
[Act2]WHENtheypublishWPI,CPI,IIP?
[Act3]WHEREdotheygetdataforWPI,CPI,IIP?
1. WPIDataCollection
2. CPIDatacollection
3. IIPDataCollection
[Act4]WHATarethecomponentsofWPI,CPI,IIP?
1. #1:WPIcomponentsofWholesalepriceindex
1. WhatisHeadlineinflationWPI?
2. WhatisCoreinflationWPI?
2. #2:CPIcomponentsofConsumerPriceIndex
1. WhatisHeadlineCPIinflation?
2. WhatisCoreCPIinflation?
3. ConsumerFoodPriceIndex(CFPI)
3. #3:IIP:SectorwiseComponents?
1. IIP:GoodswiseComponents?
[Act4]WHYREVISEWPI,CPI,IIPseries?
1. RevisionofWholesalePriceIndex(WPI)
2. WPI:Newitemsadded:
3. SaumitraChaudhuriCommitteeonWPI
4. RevisionofConsumerpriceindexseries(IIP)
5. RevisionofIndustrialIndexproduction(IIP)
6. Comparison:WPI,CPI,IIP
[Act5]WHYWPI,CPI,IIPimportant?
[Act6]Otherindexes
1. Serviceperformanceindices(SPI)
2. BalticDryindex
3. ProducerPriceIndex(PPI)
4. Somemoreindexes
[Act7]Laspeyresformula
Prologue
Chapter4:PricesandMonetaryManagement.Threesubparts
Monetarymanagement,measuresofmoneysupply,UrjitPatel
IndexesTheory:WPI,CPI,IIP,Servicesindexandothers
IndexesCurrent:SurveyobservationsonWPI,CPI&IIP,Howtocombatinflation.
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Waitwhathappenedtoremainingchapters?
Ch.8to13publishedasarticles.
Chapter1to35to7availableaspowerpointandvideos.(Willreleasethemas
articlesafterprelimsanditsunofficialanswerkey.)
[Act1]WHOcalculatesWPI,CPI,IIP?
WPI
OfficeoftheEconomicAdviser
InDIPPDepartmentofIndustrialPolicyandPromotion
InMinistryofCommerce&Industry.
CPI
CentralStatisticsOffice(CSO)
MinistryofStatisticsandProgrammeImplementation(MOSPI)
IIP
SameasCPI
[Act2]WHENtheypublishWPI,CPI,IIP?
WPIdatapublication
Weekly
EveryThursday:PrimaryArticlesandFuelGroup
IfThursdayisholidaythennextworkingday
Monthly
14thofEverymonth:allcommodities
Final
Abovetwoareprovisionalbecausesomepricesarenotavailable.
Finallistreleasedtwomonths(~EIGHTweeks).Whentheyget
authenticpricedataforallcommodities.
Ifholiday,thenWPIdatareleasednextworkingday.
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CPIandIIP:Whenpublished?
CPI
Monthlybasis:forurban,rural,allIndia.
Annual:withlagofonemonth.
State/UTsseparateCPIsreleasedonlyiftheyprovide80%ofthe
necessarydata.
IIP
monthlybasiswiththetimelagofsixweeksfromthereferencemonth.
AlthoughIIPjustashorttermindicator.Theactualresultcomealongwith
AnnualSurveyofIndustries(ASI).
[Act3]WHEREdotheygetdataforWPI,CPI,IIP?
Sofarweknow,whomakestheindex,andwhentheyreleaseit.ButWHEREdothey
getthestatisticalinputs?
WPIDataCollection
Primaryarticles
Fuelandpower
Manufacturedproducts
total
Respectiveministries,dept,PSU,StateGovernments
Sameasabove
Leadingmanufacturingunits
676items
ProblemsinDatacollection
1. Sincethecollectionofpricesisonvoluntarybasis,theflowofpricedata,
especiallyfrommanufacturingunits,becomesirregularleadingtoproblemsin
compilationofWholesalepriceindex.
2. EconomicAdviserhascreatedawebportal,sofactoryownerscandirectlysupply
data.Butmomentumnotpickedupyet.Seemstheyretoobusychangingprofile
picsonfacebook.
3. Therefore,EconomicAdvisorshasmadearrangementwithNSSOtocollectprice
datafromthemanufacturingunits,untilwebportalbecomespopular.
CPIDatacollection
WhogivesdataforConsumerpriceindex(CPI)?
Urban
areas
Rural
areas
NSSOofficialssurvey.DataenteredintoNICwebportal.
NSSOofficials+PostalOfficials(ifNSSOcantreach).Notallvillages
surveyed,only~1200villages.
IIPDataCollection
WhogivesdataforIndexofIndustrialproduction
(IIP)?
IIPinformationSupplier
Items
DIPP:DeptofIndustrialPolicy&Promotion 430
IndianBureauofMines
61
Iron&SteelJointCommittee
47
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Chem.&PetrochemicalsDept.
TextileCommissioner
VanaspatiDirectorate
JuteCommissioner
Petroleumministry
RailwayBoard
FertilizerDepartment
CoalController
DirectorateofSugar
SaltCommissioner
TeaBoard
CoffeeBoard
CentralElectricityAuthority(powerMin.)
Totalitems
47
44
11
11
11
6
6
3
1
1
1
1
1
682
[Act4]WHATarethecomponentsofWPI,CPI,IIP?
#1:WPIcomponentsofWholesalepriceindex
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EconomicAdvisor,Lespeyersformula,Baseyear2004.
Threecategories,indescendingorderofWeight
WPIcomponents
ManufacturedProductsInternalweight:Chemical>metal>food
PrimaryArticlesinternalweight:Food>Nonfood>Mineral
Fuel&Powerinternalweight:Mineraloil>Electricity>Coal
totalweight
weight
64.97
20.12
14.91
100
Thesethreecategoriesarefurthersubdividedintopictureworth1000words.
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WhatisHeadlineinflationWPI?
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Numberwegetfromallcomponentsviz.primary,fuelandmfg.
WhatisCoreinflationWPI?
coremeans,weshouldignorefoodandfuelpart.
So,coreinflation=OnlyWPIofNonfoodmanufacturingindustries.
HeadlineWPI(primary+fuel+foodmfg.industries)
#2:CPIcomponentsofConsumerPriceIndex
CSOcalculatesusingLespeyersformula,Baseyear2010
Fivecategoryofitems.IvearrangedthemindescendingorderofWEIGHT
(CombinedAllIndia)
CPIcomponents
Food,beverages,tobacco
Misc.Healtheduetc.
Housing
Fuel,light
Clothing,bedding,footwear
37.15
28
22.53
8.4
3.91
49.71
26.31
9.77
9.49
4.73
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Total
100
100
100
Mindit:RuralCPIdoesntconsiderHousinginflation.
Ranking
food,bev.,tobacco
Fuelandlight
clothing,bedding,
footware
Housing
Misc.
SubcategoriesRanking:CPI(Combined)
withinthathighestweightagegivento
Cereal>Milk>Veggies>..Sugar(lowest)
nosubgroup
(Clothingbedding)>Footware
Nosubgroup.
Transport>Medcare>Householdrequisites>>Recreation
(lowest)
WhatisHeadlineCPIinflation?
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Thenumberyougetfromcombineddataofabovecategories.
WhatisCoreCPIinflation?
CoreCPI=HeadlineCPIMINUS(foodandfuelcomponents.)
ConsumerFoodPriceIndex(CFPI)
BythesamegoodfolkswhocalculateCPI(=CSOwalla)
UsingsameLaspeyreformula
Usingsamebaseyear:2010
IftotalweightofCPI=100,thenFoodpriceindex=~52%ofitsweight
Componentsindescendingorder
Components
Rural Urban Combined
Cerealsandproducts
36.71 28.51 34.16
Milkandproducts
16.53 21.59 18.1
Vegetables
12.64 12.93 12.74
Oilsandfats
8.98 9.44 9.13
Egg,fishandmeat
6.5
7.38 6.77
Pulsesandproducts
6.25 6.11 6.2
Sugaretc.
4.64 4.11 4.47
Fruits
3.65 6.14 4.43
Condimentsandspices 4.1
3.79 4
Total
100
100
100
SofarwearedonewithcomponentsofWPI,CPIandfoodinflation.Movingon
#3:IIP:SectorwiseComponents?
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Weight:Mfg>>Mining>>Electricity
sector
weight items itemgroups
Manufacturing 755.27 620 397
Mining
141.57 61
1
Electricity
103.16 1
1
total
1000 682 399
Mindit:Totalweightis1000.So,ifyouwantpercentageweight,thenshiftdecimal
onepointtoleft.
Forexample:manufacturingweight=75.5%
IIP:GoodswiseComponents?
IIPdatareleasedintwoformats
1. Sectorwise:Mining,mfg,electricity(thatwejustsawabove.)
2. Goodscategorywiseusingthesamecomponentsasabove,butdatapresented
forgoodscategorywise.asshownbelow.
Basic
Goods
Capital
Goods
Anybulkrawmaterial/productusedinmanufacture.HighSpeedDiesel,
AviationFuel,Kerosene,Urea,Cementallkinds,Granites,iron,copper
andElectricity
Plants,machineryandgoodsusedforfurtherinvestments.Boilers,
compressors,engines,Transformers,CommercialVehiclesandall
machinerieslikeTextileMachinery,PrintingMachineryetc.
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Intermediate
Goods
Consumer
durable
Consumer
nondurable
usedformanufacturingofanotherproduct.Cottonyarn,Plywood,
Adhesives,Aluminumandsteelpipesetc.
canbeusedformorethan2/3years).PressureCooker,AC,tyre,Tv,
mobile,automobile,GemsandJewelryetc.
cantbeusedforlongperiods.FruitPulp,edibleoil,milkpowder,tea,
Cigarettes,Apparels,Newspapers,Antibioticsetc.
Goodswiseweight,Indecreasing
order:
IIP
Weight
BasicGoods
456.82
Consumernondurable 213.47
IntermediateGoods
156.86
CapitalGoods
88.25
Consumerdurable
84.6
totalweight
1000
IIP8coreindustries
1. WithinIIP,following8arecoreindustriesbecausetheyveimpactonalmostall
othereconomicactivities:
2. Coal,fertilizer,electricity,crudeoil,naturalgas,refineryproducts,steel,and
cement.
IIPDeflation
IIPisaquantitativeindex,theproductionsofitemsarebeingexpressedin
physicalterms.
Butforsomeitems,theinformationisreceivedinValuetermratherthanquantity
orvolume.
So,CSOusesWPIasadeflatortoconvertthatpriceintovolume.
[Act4]WHYREVISEWPI,CPI,IIPseries?
NowtimeforaFLASHBACKinthismovie
index newserieseffectivefrom
CPI 2011,January
WPI 2010,September
IIP
2011,June
Soifthesearethenewserieswetalkedaboutthenwhatwasthesystembeforethat?
RevisionofWholesalePriceIndex(WPI)
TheWPIserieshastoberevisedoften,becauseoftworeasons:
#1:baseyear
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Inflationisarelativeconcept.Whenwesaythereisinflationitmeansthings
usedtobecheaperatsomepreviousyear.
So,tocalculateWPI,weneedabaseyear.Baseyearshouldberevisedonceina
while.
#2:productmix
WPIcalculatesinflationusingLaspeyresformulaforweightedarithmeticmean.
Butthisformulafailstocapturethedynamicchangesinproductmixandstructure
oftheeconomyovertime.
Forexample,15yearsago,priceofVCRandmagnetictapecassetteswouldhave
mattered.Butnooneusesthemanymore.
Sameway,15yearsago,peopledidnotbuythatmuchmoisturizercreamsand
perfumes.
Hencewevetokeepchangingthecomponents.
BasedAbhijitSenCommittee
BEFORE
AFTERSenCommittee,WPIreform
NewsystemStartedfrom2010,Sep
Baseyear1993 2004
435items
676
Increasedno.ofpricequotations
1. Iffactorydirectlyexports,thendontcountthatvalueinWPI
2. Iffactorydirectlyimportsanitem,dontcountitinWPI.
Addednewitems.
WPI:Newitemsadded:
Listnotexhaustive
Primaryarticles
Lemon,GaurSeed,Rose,Jasmine,Marigold
Crudepetroleum,CopperOre,ZincConcentrate
Manufactureditems
ComputerStationery,UPS,SMPS,VCDplayer
DishAntenna,FibreOpticCable
Perfume,ScentCream,Moisturizer,BodyPowder
LeatherGloves,jackets,garments,bags
Football,Toothbrush
SaumitraChaudhuriCommitteeonWPI
CurrentWPI
676items
11vegetables
Saumitrarecommends
~1200items.
17
Expectedtobeoperationalfromnextyear
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Collectpricesfrommorecentres,togetbetterestimate.
Reduceweightofprimaryfooditems.Increaseweightofmfg.items
Baseyear2004 2009,Andthento2011
EnoughofWPI,movingon
RevisionofConsumerpriceindexseries(CPI)
PROLEMBefore
Specificgroupsonly.
(Baseyearinbracket)
Industrialworkers
(2001)
agricultural
laborers(1986)
rurallaborers
(1986)
SOLUTIONAfter
Startedfrom2011,January
baseyear2010
1.
2.
3.
4.
Rural
Urban
combined(+state/UTwiseseparatelyreleased)
ConsumerFoodPriceIndices(CFPI).
Problem=doesntgive
wholepicture
ItemlistdesignedbasedonNSSOs2004survey.Infuture,
CPIwillberevisedusingNSSOs2011survey.
Mindit:thisdoesntmeantheynolongercalculateCPIforindustrialworkersAgro&
rurallaborers.Theystilldoit.
RevisionofIndustrialIndexproduction(IIP)
EachIIPitemshouldhavecertainminimumcontributiontonationalproduction.
ForexampleVCRindustryscontributioninTodayseconomy=0%
Therefore,needtoupdatelistwithbasedontechnologicalchanges,economic
reformsandconsumptionpatternsofthepeople.
IIPBefore
IIPAfter
C.P.ChandrasekharCommittee
Baseyear:
2004
1993
Addednewitems:Apparels,GemsandJewellery,Newspapers,
pasteurisedMilk,Writing&PrintingPaper,AyurvedicMedicaments,
WoollenCarpets,WoodFurniture,TerryTowel,CoirMats&Mattings,
PolytheneBags,InstantFoodMixes,FruitPulpetc.
16.
Information
source
MSMEdroppedasasourceagency.
agencies:
ChemicalandFertilizerDepartmentadded
15
So+2minus1=1increase
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NIC1987
ItemsusedfromNationalIndustrialClassification(NIC)2004
Increasedweightgiventominingandelectricity
Decreasedtheweightgiventomanufacturing
AskedMSMEministrytodevelopaseparateindexforMSME
sector
Comparison:WPI,CPI,IIP
QUESTION
HOW?
WHO?
WHEN?
WHEREthey
getdata?
Components
types
items
baseyear
CORE
Whatdidwelearnsofar?
WPI
CPI
Lespeyresformula same
Economicadvisor CSO
weekly&monthly monthly
ministries,dept.,
NSSOandPostal
industries
workers
3:MFG>Primary
5categories
>Fuel
Rural,urban,
onlyoneWPI
combined
676
2004
2010
nonfood
headline
manufacturing
(food+fuel)
IIP
same
CSO
monthly
ministries,dept,bodies
3:MFG>Mining
>electricity
Sectorwiseandgoods
Usagewise.
682
2004
8industries
[Act5]WHYWPI,CPI,IIPimportant?
Yes,whybothercalculatingWPI,CPIandIIPinthefirstplace!?
WhyisWPIimportant?
Monitorsthedynamicmovementofprices.
Who
Government
WhytheyuseWPI?
Todesigntrade,fiscalandothereconomicpolicies
Todesignmonetarypolicy,underMultipleindicatormethod:RBIused
RBI
WPI.(ButRajanstartedusingCPIforthispurpose,sinceApril2014,
onUrjitpatelrecommendation.
Inthebusinesscontracttocalculatepriceescalationclausesinthe
Businessmen
supplyofrawmaterials,machineryandconstructionwork.
WhyCPIimportant?
Measuresthepriceofgoodsthathouseholdsconsume.
Government
Monitoringpricestability.
CalculatingDearnessAllowance
UsingasDEFLATORinnationalaccounting
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TodesignmonetarypolicyfromApril2014onwards,basedon
UrjitPatelrecommendation.
RBI
Businessmen CalculatingDearnessAllowance
WhyIIPimportant?
1. TheIIPmeasuresvolumechangesintheproductionofaneconomy
2. Providesameasurementthatisfreeofinfluencesofpricechanges
3. DatausedinGovernmentpolicyplanningpurposes,IndustrialAssociations,
ResearchInstitutesandAcademicians.
[Act6]Otherindexes
Serviceperformanceindices(SPI)
Index Doesitcoverservicesectorinflation?
WPI Nope
CPI Partiallye.g.education,healthcare
Itdoesntcaptureinflation.Itcapturesincrease/decreasein
production.
Butheretoo,Servicesectorproductionnotcounted.
IIP
Anyways,EconomicAdvisorstartedservicespriceindices(SPI).(recallhealso
doestheWPI).
Onexperimentalbasis.
Tocaptureinflationinfollowingservicesectors:
Railways
SPIs
freightandpassengerservices
Banking
SPIs
servicesforwhichbankschargefees,commissions,brokerage,etc.
RBIgetsthemdatafrom21banks(13sarkaari,4private,2foreign,
1cooperativeand1RRB).
Postal
SPIs
onlyDepartmentofPosts.
Hardlytellsanything,becauseitIGNORESfollowing:
Privatecouriercompanies
postalservicetoarmedforces(fornationalsecurityissue)
moneytransferviaWesternunion,IPO,moneyorderrevenue
stamps.
Telecom
SPIs
onlyforcellularservicesonthebasisTRAIreport.Quarterlybasis.
AllofthemusesameLaspeyresformula.
BalticDryindex
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LondonbasedBalticExchange,releasesthisindexnumberondailybasis.
Measurescosttotransportrawmaterialsbysea.
IfBaltic
number
meaning
Increases
Morerawmaterialshipped.Worldeconomygrowing
WashighestinMay2008(~11,800).
Decreases
Reverseimpactoneconomy.
After2008,Afterthatcontinuousdeclineduetosubprime,and
eurozonecrisis.
LowestMay2014(982)
ProducerPriceIndex(PPI)
measurespricechangefromtheperspectiveoftheseller.
i.e.averagechangeinsellingpricesreceivedbydomesticproducersfortheir
output.
Coversbothgoods+services.(WPIonlycoversgoods)
Sellersandpurchaserspricesdifferduetogovernmentsubsidies,taxesand
distributioncosts.Therefore,bettertousePPI.BcozCPIdoesntcoverthis.
MajorityoftheOECDcountriesmeasureinflationbasedonProducerPriceIndex
(PPI)
WPIhasbeenreplacedinmostcountriesbyProducerPriceIndex(PPI)duetothe
broadercoverageprovidedbythePPIintermsofproductsandindustries
PPIhasmoreconcordancewithsystemthenationalaccount.(comparedtoWPI)
Therefore,OfficeoftheEconomicAdviser(OEA)hastakenuptheinitiativefor
constructingaProducerPriceIndex(PPI)forIndia.
Somenotablecountries
IrelandusesBOTHWPIandPPI
OnlyWPI
Japan,Australia,Greece,Norwayand
Turkey
OnlyPPI
Canada,USA,Aussies,S.Korea,UK,
Spain,Italy
Somemoreindexes
RBI
OBICUS
Inflationexpectationsurveyofhouseholds.
Forthreemonthsand1yearaheadperiods.
OrderBooks,InventoriesandCapacityUtilizationSurvey
(OBICUS)
ByReserveBankofIndia(RBI)
Toassessconsumptionandinvestmentdemand
Surveying~2500companiesinmanufacturingsector
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Timeframe:quarterly
ASI
AnnualsurveyofIndustries
ByNSSOunderStatisticalministry
Tosurveymanufacturingsectorsgrowthandstructure
Surveyingeverymfg.unitemploying10workersormore.
Annually
HSBC
IndiaManufacturingPurchaseManagersIndices(PMI).
Monthlybasis
NEER|REER
willseethemwhenIpublisharticlesforch6and8.inthe
meantimeyoumayrefertothepowerpointorlecturevideos..
[Act7]Laspeyresformula
Notforprelims.ButwhentheywanttobeginSTRESSinterviewparticularlyduring
bank/MBA.
LaspeyrewasaGermaneconomist.
HisformulausedincalculationofWPI,CPI,IIP,servicepriceindices.
ItisaWeightedarithmeticmean.
Letsunderstandwithacrudeexample.
SupposealocalthugsINFLATIONindexusesfollowingformat,with2004as
baseyear.
Hecanonlydecidethebaseyearandweightsassignedtoeachcomponentson
hisown.Condition:heshoulddistributetheweightinsuchmannerthattotal
weightis10,100,1000thatway%calculationiseasier.
Afterthat,monetarypolicies,fiscalpoliciesandmarketforceswilldeterminethe
pricesinbaseyearandcurrentyear.Hejusthastoapplyformula.
So,exceldatalookslikethis:
Components weight 2004prices 2014prices
Desiliquor
10
Rs.10
Rs.15
Gutkha
20
Rs.2
Rs.5
Cinema
70
Rs.50
Rs.75
Weight
100
First,Illfindrelativeprice(CurrentpricesdividedbyBASEyearsprices)
Components weight 2004prices 2014prices
Desiliquor
10
Rs.10
Rs.15
Gutkha
20
Rs.2
Rs.5
Cinema
70
Rs.50
Rs.75
R
1.5
2.5
1.5
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NowIllmultiplyRelativepricewithweightassignedtoeachcomponents
Components weight 2004prices 2014prices
Desiliquor
10
Rs.10
Rs.15
Gutkha
20
Rs.2
Rs.5
Cinema
70
Rs.50
Rs.75
Total
100
R
1.5
2.5
1.5
RxW
15
50
105
170
Finally,theadditionofRXWwillmeindexnumberforcurrentyear.
15+50+105=170.
ThatmeansCurrentinflationin2014,is70%,comparedtothepricesinbaseyear
2004.
In2015,IfIgetthenumber180=80%inflationthanbaseyear(2004)
Butcomparedto2014,the2015syearoninflationwouldbe(180170)/170=~6%.
Statisticallywecanexpresswiththisformula:
Note:somebooksuseP0/Q0,itsbasicallythesame.Becausetheytakeweightas=
(pxq).
Someotherindexes(onlyGIST,notgoingindetails)
Paasche TellsuswhattodaysBasketofcommodities,wouldhavecost
index
@yesterdaysprice.
Fisher
Geometricmeanof(LaspeyreseandPassche).Thissolvetheproblemof
index
substitutionbiasinconsumerExpenditure.
ArticleprintedfromMrunal:http://mrunal.org
URLtoarticle:http://mrunal.org/2014/08/explainedwpicpiiipindexcomponent
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MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP
coreinflationheadlineinflationlaspeyre.html
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http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/
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