Inflation

• It is the price rise of a specific set of

goods
Introduction:-
• Food prices, rentals and real estate prices are
soaring.
• Inflation reduces the purchasing power of your
money.
• It destabilizes the economy.
• However little inflation increases spending and
borrowing and also long term investments.
• Rising inflation was the most recent tickling
political issue that hit Manmohan Singh
Government.
• What was the actual reason? – Was it because of
price rise in essential commodities or wrong
method of calculating inflation?
• Economists V. Shunmugam and D.G. Prasad
working with multicommodity exchange have
come out with a research paper claming that
there are serious flaws in the present method
of calculating inflation.

• So, how does India calculates the inflation

and how it is calculated in developed
countries?

• India uses WPI- Wholesale Price Index

whereas most developed countries use the
CPI- Consumer Price Index to calculate the
inflation.
 WPI:- Wholesale Price Index
• It was first published in 1902 and one of the
most important indicators available to
policyholders until it was replaced by CPI by
most developed countries in 1970’s.

• It is the index that is used to measure the

change in the average price level of goods
traded in wholesale market commodities i.e.
exactly 435.

• The Indian government has taken WPI as an

indicator of the rate of inflation in the economy.
CPI:- Consumer Price Index

• It is a measure of the average price of

consumer goods and services purchased
by households.

• CPI is an official barometer of inflation in

many countries such as the US, the U.K. ,
Japan, France, Canada, Singapore & China

• CPI actually measures the increase in price

that a customer will ultimately have to pay
for.
Flaws in calculating inflation on
WPI
• It doesn't properly measure the exact
price rise an end-customer will
experience as it is at wholesale level.

• Main problem with WPI calculation is

that more than 100 out of 435
commodities included in index have
ceased to be important from the
consumption point of view
Why India is not switching over to the CPI
method

• Finance ministry says that there are

four different CPI indices which makes
the switching fairly ‘Risky and
Unwieldy (unmanageable)

• Those are Industrial workers, Urban

manual employees, Agricultural labors
and rural labors.
How to tackle Inflation ?

• Allowing Rupee to appreciate i.e. re-

evaluation of Indian rupee.
• Time for a re-think on our exchange rate
policy.
• Control on population explosion.
• To bring more transparency in the
entire process through which interest
rate setting is done so that financial
markets would better know what is
being done and why.