Wholesale Price Index and Consumer Price Index: Components and Trends 

Price stability is one of the key objectives of every macroeconomic policy formulation in an economy as it helps stabilize nominal interest rates, thereby promoting higher investment and growth. High levels of inflation, or price instability, may reduce purchasing power in future and therefore may adversely affect savings, investment and economic growth. Inflation may also increase the chances of higher business risk and lower export competitiveness. In India, inflation is measured using various price indices. The most commonly cited indices are Wholesale Price Index (WPI) which is a measure of average change in wholesale prices of goods in the economy and Consumer.

Price Index (CPI) which measures the change in the general level of retail prices of selected goods and services that households purchase for the purpose of consumption. Other available indices include the GDP deflator which is a complete measure of inflation defined as a ratio of GDP at current prices to GDP at constant prices and Private Final Consumption Expenditure (PFCE) deflator which provides an implicit inflation estimate for the economy. Both the indices are derived from National Accounts Statistics. However, both GDP deflator and PFCE deflator are available only on a quarterly basis with a lag of two months since 1996. For this reason, the focus of this study is on WPI and CPI for industrial worker (CPI-IW) indices and the issues that surround Indian inflation measured using these two indices. CPI in India is compiled for four different segments of the population that is Industrial Worker (IW), Agricultural Labour (AL), Rural Labour (RL) and urban non-manual employees (UNME). Central Statistics Office (CSO), started releasing data on a new measure of Consumer Price Index (CPI) with base 2010=100 for all India as well as States and Union Territories since January 2011.

This new index of CPI is known as Combined CPI and includes price indices separately for rural and urban population. New CPI comprises of computational changes which makes it more robust as compared to the old CPI index. This index is constructed to ensure better comparability with CPI of other countries. Until recently, WPI was considered as the measure of headlinec inflation because it was available at a higher frequency. Since, WPI also covered large number of items at a disaggregated level, it was favoured as an index for a better analysis of inflation in the economy.

Price Index

The price index is an indicator of the average price movement over time of a fixed basket of goods and services. The formation of the basket of goods and services is done keeping into the consideration, whether the changes are to be measured in retail, wholesale or producer prices. At present, separate series of index numbers are compiled to capture the price movements at retail and wholesale level in India. The Wholesale Price Index (WPI) number is a measure of average wholesale price movement for the economy. 

Wholesale Price Index (WPI)

Wholesale Price Index (WPI) is an indicator of price changes in the wholesale market.  WPI calculates the price paid by the manufacturers and wholesalers in the market. WPI measures the changes in commodity price at selected stages before goods reach the retail level.

The introduction of the revised series of Index numbers of wholesale prices, with 1993-94 as the base year, is expected to provide a more realistic picture of inflation. The new base year has been chosen based on the well-known criteria, the desired properties being:

(i) a normal year for level of production and trade as also for price variations;

(ii) a year for which reliable price and other data are available; 

(iii) a year as recent as possible.

With a view to reflecting adequately the changes that have taken place in the structure of the economy since 1981-82 (the base year of the old series), almost all the important items being transacted in the economy have been included in the revised index. The new series with 1993-94 as the base has as many as 435 items in the commodity basket. Thus, the nuinber of items included in the new series is, in fact, smaller than the 447 itmes in the 1981-82 series. However, the composition of the new series has been rationalised by incorporating newly emerging and important items, deletion of unimportant ones, 'amalgamation of less important items with similar ones and splitting of certain items.

In all, 136 distinctly new itmes have been added in the revised series. Besides, a number of varieties/grades, which are merely quotations of some items in the 1981- 82 series without having any weight, have been upgraded to the level of commodities in the series. Again a few items of the earlier series have been amalgamated because of their simlilarity in characteristics and for making their description more purposeful. As many as 150 items figuring in the 1981-82 series have been dropped due to their insignificant contribution in tenns of their relative value of production in the economy. Only 68 percent of the items/commodities are common in the old and new series. Some of the important items that have entered the WPI commodities basket for the first time are electricity for railway traction, purified tereptlialic acid (PTA), injection moulded plastic items, oxygen gas cylinder, railway sleepers (cement), thinner ms/ss ingots, cold rolled sheets. LPG cylinder, jelly filled telephone cables, colour TV sets, computer and computer based systems. Some of the dropped items are mica, imported petroleum crude. indigenous petroleum crude, khadi handloom cloth, broad gauge open wagons, and wrist watches.

The weight of 'primary articles' has significantly declined while that of 'manufactured products' has gone up considerably in the revised series. This situation has arisen as a consequence of the relatively slower growth in the agricultural sector particularly -food articles' and 'non-food articles - in the major group, -primary articles. The weight of primary articles group has declined to 22.02 per cent in the new series from 32.29 in the 1981-82 series. On the other hand the  of 'fuel power, light & lubricants' group has gone up to 14.23 per cent from 10.66 per cent and that of manufacturcd products' group has gone up to 63.75 per cent from 57.04 per cent. The new weights are in conformity with the structural changes that have taken place in the economy since the introduction of 1981-82 series.

A comparative analysis of the general wholesale price index of the revised series and the earlier 1981-82 series shifted to 1993-94 base shows that the revised series starts off from a level higher than the old series for the year 1994-95 and thereafter, the two series are more in consonance with each other. In fact, tlie rate of change in the revised series after 1994-95 is sligtly lower than the old series as the commodity composistion of the revised series reflects better quality products sometimes a little higher in absolute price level.

The Working Group under the Chairmanship of Prof. S. R. Hashim. which finalised the composition of the new WPI series, has stressed the need for more frequent revisions in the wholesale price index because of the greater integration of our Working Group has also suggested that a serious attempt be made to incorporate services in the index, which occupies nearly one half of income generated in the economy. It has suggested that initially the effort should begin with a restricted number relatively important service industries for which the data are available and eventually a new series of WPI combining the cornniodities and services may be brought out. (Source : Economy Diary by S.D. Naik . Business Line, and April 25. 2000)

WPI series is compiled and released by the Office of the Economic Adviser (OEA), Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI). WPI tries to capture the movement of prices in the economy at the wholesale level. It is used as a deflator for various nominal macroeconomic variables to derive the real variables. The base year of WPI is revised from time to time in order to sync it up with the other indicators in the economy. WPI with base year 2004-05 was launched in September 2010. Its next revision occurred recently with base year 2011-12 which synchronized it with the base year of other important indicators such as GDP and Index of Industrial Production (IIP). The new series was introduced in May 2017.

As per the manual on WPI (2004-05=100) released by CSO, WPI is based on select items which are considered important regionally on the basis of traded values of commodity baskets. Construction of WPI series with base year 2004-05 involves taking each product group in the commodity basket which covers at least 80 percent of the traded value at the group level. The components of WPI are divided into three groups: Primary Articles which mostly consist of Food items; Fuel and Power; and Manufactured Products.Table 1 summarises the comparative weights, number of items and quotations for different components of old and new WPI series.

  

Evolution of WPI in India

According to the WPI manual (base 2011-12=100), GOI, “In the WPI (base 2004-05) series, ex-factory prices, inclusive of excise duties, were used as first point of bulk sale in respect of manufactured products. However, in the 2011-12 WPI series, the effective prices for Manufactured Products used for compilation has been changed to be defined as the “basic/list price- rebate/ trade discount”, thus leaving out any indirect taxes such as Central Excise Duty (CED) as part of price definition.”
Excluding indirect taxes from price definition is in concordance with the international practice of computing inflation and brings it closer to the concept of producer price index. WPI series with base year 2004-05 is calculated in the following manner. Firstly, the price index for each commodity is calculated individually using the price relativesg for all price quotations of a commodity. Then a simple arithmetic mean is computed for all price relatives.
The same procedure is adopted for all 676 price quotations to obtain 676 price indices. However, the procedure to compute price indices for WPI with base year 2011-12 has changed. First, the elementary price index is calculated using “Jevons Index formula”, which uses the Geometric Mean (GM) of price Relatives. This is the lowest level of aggregation which yields the price indices. In the second stage, the elementary price indices are aggregated using weighted Arithmetic Mean (AM) and higher level indices are obtained using Laspeyre’s index formula.
As pointed out in the WPI manual GOI13, WPI data collection is not done on a defined periodicity and there are no pan-India collection centres. Price quotations for manufactured items are collected through online surveys conducted by the Ministry of Commerce and Industry whereby designated factories submit their data online. Price quotations for food items are put together by the Ministry of Agriculture whereas fossil fuel prices are put together by Ministry of Petroleum and Natural Gas and by Public Sector Units (PSUs). Earlier, WPI data was released on a weekly basis by Ministry of Commerce and Industry but since February 2012, it is available only on a monthly basis.
The WPI based inflation is used by the government in formulation of trade, fiscal and other economic policies. Business firms, policy makers, statisticians, and accountants use WPI as a useful objective indexing tool when they formulate price adjustment clauses. However, there are also certain limitations in the use of WPI index. Price of services is not included in WPI index. Moreover, for all economic policymaking, the CPI is used as a relevant indicator, internationally and not the WPI.

Concepts and Methodology of WPI

Changes in Definition of Wholesale Price Index Wholesale price is generally defined to capture all bulk transactions of goods carried out in the domestic market. The universe of WPI, therefore, comprises all possible transactions at first point of bulk sale in the domestic market. However, there are, in practice, many points of bulk sale, such as for agricultural items for which it refers to the mandi price; for minerals, it refers to ex-mine prices; and for petroleum products it refers to Refinery Transfer Price (RTP). In the WPI (Base 2004-05) series, ex-factory prices, inclusive of excise duties, were used as first point of bulk sale in respect of manufactured products. However, in the 2011- 12 WPI series, the effective prices for Manufactured Products used for compilation has been changed to be defined as the “basic/list price – rebate/trade discount”, thus leaving out any indirect taxes such as Central Excise Duty (CED) as part of price definition. Excluding indirect taxes from ex-factory prices for manufactured products is in line with international practices and inflation estimates are not influenced by fiscal policy changes. Also, this change would bring WPI closer to the concept of Producer Price Index (PPI), for the Manufactured Products. 

Treatment of Exports and Imports

In the WPI (Base 2004-05) series, weights of the item basket were derived by calculating the net traded value by adding the net imports to the domestic production. This practice has been retained in the new series also. The only exception to this rule being the ‘Crude Oil’ where only domestic value of production was considered as crude is not traded in the domestic market. The reason for this is that imports of Crude Oil are very large as compared with the domestic production, and crude itself is not traded in the domestic market. Moreover, its derivatives (i.e petroleum products) are already included in the WPI item basket as individual products in the major group ‘Fuel and Power’.

Compilation of Edible Oil Weights Group:

Edible oils falls under the four digit subgroup “Manufacture of vegetable and animal oils and fats”. Although for all the manufactured product sub groups, the value of output was adjusted for exports and imports only at the two digit level, an exception was made for the group “Manufacture of Vegetable and Animals Oil & Fats” on the recommendation of the Department of Food & Public Distribution. For this four digit group, its net traded value was distributed on a pro rata basis based on value of output of edible oils adjusted for exports and imports at item level. This was done to factor in very high imports of edible oils, in particular, palm oil.

Treatment of Coal

In the WPI (Base 2004-05) series, there were four items

(1) Coking Coal

(2) Non-Coking Coal

(3) Coke and

(4) Lignite;

under sub group ‘Coal’ of “Fuel & Power” Major Group. Coke as an item has been deleted from sub group ‘Coal’ of Fuel and Power in WPI (Base 2011-12) series. Non-Coking Coal has been trifurcated into the following categories as separate items based on Gross Calorific Value (GCV) grades. a. Non-Coking Coal G1 to G6 [GCV >5500 Kcal/kg.] b. Non-Coking Coal G7 to G14 [GCV 3100 Kcal/kg to 5500 Kcal/kg] c. Non-Coking Coal G15 to G17 [GCV < 3100 Kcal/kg.] The pit head run of mine price of coal has been considered for WPI under the new series (2011-12).

Selection of Base Year 

The well-known criteria for the selection of a new base year are:

(i) a normal year, i.e., a year in which there are no abnormalities in the level of production, trade and in the price level and price variations,

(ii) a year for which reliable production, price and other required data are available, and

(iii) a year as recent as possible and comparable with other data series.

The year 2011-12 was assessed to be a normal year from the point of view of agriculture production and commodity prices. The Central Statistics Office (CSO) shifted its National Account Statistics (NAS) base to the new base year of 2011-12. In order to make the WPI series compatible with other important series in terms of a common base to all of them it was decided that the year 2011-12 would be the new base year for the new WPI series also. 

Selection of Basket

With a view to reflecting adequately the changes that have taken place in the structure of the economy, almost all the important items being transacted in the economy have been included in the revised basket.

• Selection of Agricultural Commodities 

The choice of commodities, varieties/ grades, market centres and sources of price data in respect of agricultural commodities has been made as per the recommendations of the SubGroup on Agricultural Items. The Sub-Group on Agricultural Items recommended the inclusion of new items such as Bitter Gourd, Mosambi (Sweet Orange), and Pomegranate. In addition to these some more items such as Tamarind, Pumpkin, Bottle Gourd, Cucumber, Beans, Carrot, Radish, Pointed gourd, Drumstick, Cherry, Jackfruit, Pear, Almonds, Walnut and Betel Leaves, Peas/Chawli, Rajma, Jackfruit, and Pear, have been added as the Working Group considered these relatively important.

• Selection of items in the Mineral, Crude Petroleum and Natural Gas Group and Fuel and Power Major Group

The Mining, Fuel and Power Sub-Group recommended the selection of items under Fuel and Power major group and minerals sub-group of Primary Articles Major Group.

1) Minerals: For inclusion of the mineral items and their grades, market centres, etc., the working Group went by the suggestions of the Indian Bureau of Mines.Under Minerals Group, new minerals such as Copper Concentrate, Lead Concentrate and Garnet were added whereas Gypsum, Kaolin, Dolomite, Barytes, Steatite, Copper Ore, Graphite, Fireclay and Magnesite were removed in the new series of WPI base 2011-12. Dolomite, Barytes, Gypsum, Kaolin and Steatite have been declared as minor minerals under Mineral Conservation and Development Rules and hence their data would not be collected by Indian Bureau of Mines which is the source agency for price data of minerals. New minerals such as Copper Concentrate, Lead Concentrate, and Garnet have been added in the new basket.

2) Crude Petroleum & Natural Gas: Value of Crude Petroleum was taken from Indian Petroleum and Natural Gas Statistics (2011-12) for deriving its weight. As indicated earlier, the value of imported crude was not taken into account while deriving its weight on the ground that crude is not traded as such in the domestic market and its derivatives are already included in the basket as independent items in the major group Fuel and Power.
3) Fuel & Power: The item basket for the Fuel and Power Group was finalized based on suggestions received from Ministry of Petroleum and Natural Gas, Office of the Coal Controller and Central Electricity Authority. The sub-group also proposed to include Natural Gas as a separate item under Primary Articles in the new series along with Crude Oil. 

In the WPI (Base 2004-05) series, there were 10 items with 47 price quotations under ‘Mineral oils’ reported by three PSUs (IOCL, BPCL and HPCL) covering three metro cities Mumbai, Kolkata and Chennai. In view of the rapid growth of refineries in the country and variation in prices in coastal and inland refineries, it was realized that the inland refineries should also be brought under the ambit of the new series so as to improve the all-India coverage of WPI. Therefore, number of price quotations has been increased to 266 in WPI (Base 2011-12) series. Petroleum coke has been introduced as a new item in view of its increased consumption. Light Diesel Oil (LDO) has been dropped in view of the decline in its production and consumption. 

Comparative Statement of number of Products and Price Quotations

Limitations of Wholesale Price Index (WPI)

As an economy wide high frequency indicator, WPI provides an estimate of the headline inflation at wholesale level and is also used for the purpose of GDP deflator for sectors where the output is available in value terms. 

WPI is also being used by various agencies for indexation/escalation purposes. WPI as an indexation yardstick has been preferred over other price indicators due to its availability, its spread/coverage and credibility. WPI measures price changes objectively, both at aggregate level and for particular products, free from possible manipulation by either of the contracting parties. Being an economy-wide index, it is natural for WPI to capture the most important items. Selection of items also depends on the availability of the monthly information (price quotations). It is natural, therefore, that many commodities and items or sub-items may not find a place in the WPI. This limitation of the WPI must be known upfront to any agency, which is using the WPI for the purpose of indexation. The unit price for any item within the WPI system is collected from establishments under the clause of confidentiality and is not published.

Provisional WPI is released with a time lag of two weeks of the reference month and is initially provisional. After eight weeks, the index is finalized and final figures are released and then frozen thereafter. Thus, no further changes are incorporated in the index after 10 weeks. Because of this approach, delayed responses from data sources can only be included retrospectively only up to 8 weeks. Though the delayed responses are captured for more current period and the index gets aligned to recent prices, the back series of the index (of earlier weeks) may continue to differ as it is frozen. There may also be some problems of non-response for a particular commodity/item or commodity/group, which delay the alignment for a considerable period.

There has normally been a difference between provisional and final figures and this is not unique to WPI. Every other series including GDP, IIP, CPI etc. also have a mechanism of revising the initial estimates during a well-defined time interval. 

WPI series has been revised by shifting base year from 2004-05 to 2011-12 and the basket of commodities/items has been reselected afresh in order to capture the recent structure of the economy. As such, there may not be one-to-one correspondence for all commodities in the two series.

Consumer Price Index (CPI) 

A Consumer Prices Index (CPI) is designed to measure changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes. In view of the popular misconception about the relative meanings and purposes of the Consumer Price Index and Cost of Living Index, and the general tendency to equate the two, it is pertinent to discuss the distinction between the two concepts and bring out clearly what they purport to measure in relation to one another. 

Consumer Price Index (CPI) is a price index that represents the average price of a basket of goods over time. CPI calculates the average price paid by the consumer to the shopkeepers. Education, communication, transportation, recreation, apparel, foods and beverages, housing and medical care are the 8 groups for which the CPI is measured.

Consumer Price Index or CPI is the measure of changes in the price level of a basket of consumer goods and services bought by households. CPI is a numerical estimation calculated using the rates of a sample of representative objects the prices of which are gathered periodically.

• The CPI captures changes in price level at the consumer level.
• Changes in prices at the producer level are tracked by the Wholesale Price Index (WPI).
• CPI can capture the change in the prices of services which the WPI cannot.

A price index is a measure of the proportionate, or percentage, changes in a set of prices over time. A consumer price index (CPI) measures changes in the prices of goods and services that households consume. Such changes affect the real purchasing power of consumers’incomes and their welfare. As the prices of different goods and services do not all change at the same rate, a price index can only reflect their average movement. A price index is typically assigned a value of unity, or 100, in some reference period and the values of the index for other periods of time are intended to indicate the average proportionate, or percentage, change in prices from this price reference period. Price indices can also be used to measure differences in price levels between different cities, regions or countries at the same point in time. Consumer price indices (CPIs) are index numbers that measure changes in the prices of goods and services purchased or otherwise acquired by households, which households use directly, or indirectly, to satisfy their own needs and wants. Consumer price indices can be intended to measure either the rate of price inflation as perceived by households, or changes in their cost of living (that is, changes in the amounts that the households need to spend in order to maintain their standard of living). There need be no conflict between these two objectives. In practice, most CPIs are calculated as weighted averages of the percentage price changes for a specified set, or ‘‘basket’’, of consumer products, the weights reflecting their relative importance in household consumption in some period. Much depends on how appropriate and timely the weights are. 

Coverage of the index 

In defining a Consumer Price Index, the scope and coverage of the index should be clearly explained. For example, it should specify the population group covered, say, urban wage earners, agricultural laboureres, rural population, etc. The geographical area covered e.g. a particular city, a well-defined industrial area or a state should also be specified in respect of a Consumer Price Index. The population group for which Consumer Price Index Numbers are generally in demand, is the group of wage earners living in an urban or semi-urban centre, because in organized sectors of employment the regulation of wage and/or dearness allowance in accordance with movement in the Consumer Prices Index Numbers is an increasingly common practice now-a-days. The desirability or avoiding multiplicity of Consumer Price Index Numbers was considered by the Technical Advisory Committee on Cost of Living Index Numbers set up by the Government of India, at its sixth meeting held in September, 1961. The Committee inter-alia, made the following recommendation: “The Committee expressed itself against multiplication of Consumer Price Indexes indefinitely by building up new series for various sections and sub-sections of population at each and every place where industries are located, and suggested that to the extent possible, existing index numbers should be used for neighbouring centres and allied sections of population. The broad pattern already recommended by the Committee included separate index numbers for industrial workers, agricultural labourers, and non-manual employees in urban areas.It was reiterated that this pattern would be adequate for all practical purposes and groups of population.” 

The origins and uses of consumer price indices

CPIs must serve a purpose. The precise way in which they are defined and constructed depends very much on what they are meant to be used for, and by whom. As explained in Chapter 15, CPIs have a long history dating back to the eighteenth century. Laspeyres and Paasche indices, which are still widely used today, were first proposed in the 1870s. They are explained below. The concept of the cost of living index was introduced early in the twentieth century.

• Traditionally, one of the main reasons for compiling a CPI was to compensate wage-earners for inflation by adjusting their wage rates in proportion to the percentage change in the CPI, a procedure known as indexation. For this reason, official CPIs tended to become the responsibility of ministries of labour, but most are now compiled by national statistical offices. A CPI that is specifically intended to be used to index wages is known as a compensation index.
• CPIs have three important characteristics. They are published frequently, usually every month but sometimes every quarter. They are available quickly, usually about two weeks after the end of the month or quarter. They are also usually not revised. CPIs tend to be closely monitored and attract a lot of publicity.
• As CPIs provide timely information about the rate of inflation, they have also come to be used for a wide variety of purposes in addition to indexing wages. For example 

1.  CPIs are widely used to index pensions and social security benefits. 
2. CPIs are also used to index other payments, such as interest payments or rents, or the prices of bonds.
3. CPIs are also commonly used as a proxy for the general rate of inflation, even though they measure only consumer inflation. They are used by some governments or central banks to set inflation targets for purposes of monetary policy.
4. The price data collected for CPI purposes can also be used to compile other indices, such as the price indices used to deflate household consumption expenditures in national accounts, or the purchasing power parities used to compare real levels of consumption in different countries.

• These varied uses can create conflicts of interest. For example, using a CPI as an indicator of general inflation may create pressure to extend its coverage to include elements that are not goods and services consumed by households, thereby changing the nature and concept of the CPI. It should also be noted that because of the widespread use of CPIs to index a wide variety of payments – not just wages, but social security benefits, interest payments, private contracts, etc. – extremely large sums of money turn on their movements, enough to have a significant impact on the state of government finances. Thus, small differences in the movements of CPIs resulting from the use of slightly different formulae or methods can have considerable financial implications. CPI methodology is important in practice and not just in theory.    
• In determining the scope of the index ,the time of recording and valuation of consumption, it is important to consider whether the purposes for which the index is used is best satisfied by defining the consumption in terms of ‘acquisition, “use”, or “payment’. The acquisition approach is often used when the primary purpose of the index is to serve as a macroeconomic indicator. The payment approach is often used when the primary purpose of the index is for the adjustment of compensation or income. Where the aim is to measure the cost of the living the “use” approach may be more suitable. However, under Indian conditions, for recording the consumption expenditure ,a combination of all the three approaches, namely consumption for Food group, maiden use for clothings and foot wear, and payment (expenditure )approach for durable and personal effects is employed . Consequently , the same index is used for various purposes.
• Consumer Price Index Numbers are mainly used everywhere and especially in this country, for the adjustment of wages and salaries. As a matter of fact, the origin of many current Consumer Price Indices can be traced to the specific need for an indicator which would perform such a function. Thus, wages are adjusted to change in prices as reflected by the index, in order to provide for the maintenance or improvement of a given level of real wages.
• The Consumer Price Index Numbers can also be used for real wage calculation, i.e. as deflators of money wages. The economic well-being of a class of population say, working class is determined largely by how much they can buy for the money wages they receive, and this is indicated by the real wage. The Eighth International Conference of Labour Statisticians defined real wages as “the goods and services which can be purchased with wages or provided as wages”. Real wages can be calculated by dividing the money wages by the Consumer Price Index. So, the real wage index comes out as a quotient between the money wage index and the Consumer Price Index. It is, however, implied that the money wage index and Consumer Price Index relate to the same population group as far as possible.
• Besides their use in wage adjustments and the calculation of real wages, the Consumer Price Index Numbers also serve other purposes such as price adjustments in business and individual contracts, deflation of income and value series in national accounts and price analysis. The index is widely used by Governments for formulation of general economic policy particularly with respect to wages, prices and taxation. The use of the Consumer Price Index is even reported in the matter of adjustment of the amount of alimony payments and annuities.
• The Consumer Price Index is used to provide an average measure of price inflation for the household sector as a whole, for use as a macro-economic indicator. The group, sub-group and item level indices are also used to deflate components of household final consumption expenditure in the national accounts and the value of retail sales to obtain estimates of changes in their volume.
• Given that the Consumer Price Index may be used for many purposes, it is unlikely that one index can perform equally satisfactorily in all applications. It may, therefore, be appropriate to construct a number of alternative price indices for specific purposes, if the requirements of the users justify the extra expense, and each index should be properly defined and named to avoid confusion and a ‘headline’ Consumer Price Index measure should be explicitly identified.     
• Where only one Consumer Price Index is compiled, it is the main use that should determine the type of index compiled the range of goods and services covered, its geographic coverage, the households it relates to, as well as the concept of price and the formula used. If there are several major uses, it is likely that compromises may have to be made with regard to how the Consumer Price Index is constructed. Users should be informed of the compromises made and of the limitations of such an index.                                   

When a monthly or quarterly CPI is first published, however, it is invariably the case that there is not sufficient information on the quantities and expenditures in the current period to make it possible to calculate a symmetric, or superlative, index. While it is necessary to resort to second-best alternatives in practice, being able to make a rational choice between the various possibilities means having a clear idea of the target index that would be preferred in principle. The target index can have a considerable influence on practical matters such as the frequency with which the weights used in the index should be updated.

Consumer prices measure the retail prices of goods consumed by the consumer in the economy. CPI number provides a measure of change in the living costs of workers, so that their wages could be compensated to the changing level of prices. CPI in India is constructed for different segments of the population. There are five different measures of CPI:
• CPI/Industrial Workers (CPI-IW).
• CPI/Agricultural Labourers (CPI-AL).
• CPI/Rural Labourers (CPI-RL).
• CPI/Urban Non-Manual Employees (CPIUNME).
• CPI-Combined (CPI-C).
The first four measures are segment specific measures of CPI. Out of these, the first three are compiled by the Labour Bureau, Shimla whereas CPI-UNME is compiled by the CSO based at New Delhi. Among these four measures, CPI for Industrial workers (IW) has a broader coverage and is the most commonly used index than the other indices. It is used as a cost of living index in the organised sector of the economy. It is currently computed with base year 2001.Labour Bureau has recently recommended that the base year of CPI-IW be changed to 2013-14. The other three indices are not so commonly used because of the older base year used in compiling themi, as the older base fails to capture the structural transformation of the economy. The fifth measure of CPI, CPI-Combined, is being released by CSO since January 2011.
An all-India weighted index for CPI-IW with base 1960=100 was started for 50 centres on the basis of weighting diagram drawn by conducting the Family Living Survey in 1958-59. Under this series, the coverage of CPI-IW is limited to three sectors; factories, mines and plantations. The coverage of the series with base 1982 and 2001, is extended to four more sectors; Railways, Public Motor Transport Undertakings, Electricity Generation, and Ports and Docks. Under the CPI-IW series with base 2001=100, labour bureau compiled data for 78 selected centres and for an all-India Index.

These centres were selected on the basis of their industrial importance in the country. Different product groups used in compilation of CPI-IW are: Food, Pan, Supari, Tobacco and Intoxicant, Fuel and Light, Housing, Clothing, Bedding and Footwear and Miscellaneous. The retail prices used in the index calculation are those that are charged from consumers for cash transactions and are inclusive of all taxes which are payable by him. CPI-IW index is compiled and released every month with a time lag of about 4 weeks.

The index is compiled using Laspeyre’s Formula. The compilation is first done, at the sub-group level and then at group level and lastly at the basket level, which is called the general CPI-IW index. The National Statistical Commission (NSC) constituted under Dr. C. Rangarajan in 2001, observed in its report that CPI numbers released by the labour bureau cater to specific segments of the population and could only be considered as partial indices. It is also argued that CPI-IW does not reflect changing pattern of demand that has occurred over time. This Commission, therefore, recommended for compilation of CPI for Rural and Urban areas separately. The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation started releasing three new measures of Consumer Price Indices (CPI) with base 2010=100 from January 2011. These are:
• CPI-Combined for all-India and States or Union Territories.

• CPI-Rural for Rural areas.
• CPI-Urban for Urban areas.
 

Earlier, these series were available with base year 2010 but recently in 2016 the base year of these series is revised to 2012. The basket of items and their weighting diagrams are constructed using the Modified Mixed Reference Period (MMRP) data of Consumer Expenditure Survey (CES), 2011-12, which is 68th Round of National Sample Survey (NSS). Data on prices are collected from 1181 village markets which cover all districts and 1114 urban markets spread over 310 towns of the country.

The components of CPI-Combined are: Food and Beverages which constitute a weight of 46 percent in the index; Pan, tobacco and Intoxicants; Clothing and Footwear, which constitutes a weight of 6 percent; Housing constitutes of 10 percent weight and Fuel and Light which constitutes a weight of 7 percent. Finally, miscellaneous category comprises of household goods, education, recreation, health services, transport and communication and personal care which constitutes a weight of 28 percent in the index.

Price relatives in the elementary indices of the new CPI series are computed using GM. This is also in line with the international practice of computing CPI. In the CPI-IW series, AM was used for computing relatives. The advantage of using GM is that it helps to even out volatility of the indices as GM is less affected by extreme values. In the second stage these elementary price indices are aggregated to obtain higher level indices using consumption expenditure as weights. For this purpose, Laspeyeres index formula is used. 

Reliability of CPI

The use of the Consumer Price Index need not be limited to the sole purpose for which it has been specifically designed, it can be extended to other fields too, subject to the requirements in respect of precision, etc. The reliability of the index for the purpose of adjustments in wages of a given population group depends upon how far this group of wage-earners (to which the index is desired to be applied) is similar to the population group for which the index has been actually constructed. If the consumption pattern of a given population group is too far from that of the index population, the application of the index to the former group may not be appropriate. For instance, in case of urban wage earners and salaried employees, a single Consumer Price Index series might suffice, inspite of the existence of inter-class differences in consumption patterns. On the other hand, it would not be proper to use such an index for wage negotiation or arbitration in the case of workers far from the above group, say, mining workers or rural workers whose consumption patterns and environments may be greatly at variance with those of urban wageearners.

The deflation of nominal wages by the Consumer Price Index provides a measure of the purchasing power of wages at constant prices. If prices rise more rapidly that wages, the commodity income (i.e. the real value of goods and services purchased with money income, also called real income) will decrease. Up to a certain point this process will not bring about significant changes in the level and pattern of consumption of the concerned population group but beyond that point there will be considerable changes in the expenditure outlays of the families/household of the concerned population group, and the market basket based on which price index series is compiled, will itself change significantly. The same is true in the opposite case when wages rise more rapidly than prices. Thus, below or above the certain limits of fall or rise in the level of real wages the comparison itself tends to become irrelevant in view of the altered market basket in the current situation. In fact, if the estimated index numbers of real wages exhibit a sharply rising or falling tendency, this in itself may be taken as an indication that the Consumer Price Index series used has outlived its utility.

 Limitations of CPI

The use of sampling method(s) in the collection of price data introduces sampling errors in the compilation of the index. Hence, it is necessary to ensure the representativeness and adequacy of the samples selected at several stages with a view to minimizing these errors. This will result in greater reliability of the Consumer Price Index in its various uses and applications. While most of the uses of the Consumer Price Index mentioned above, are suggested by the basic nature of the index as a measure of changes in prices and purchasing power, one should also guard against its inappropriate use for certain other purposes. Some of the limitations of the index in this regard are briefly discussed below:- 

• Under no circumstance Consumer Price Index can be used to measure changes in costs or standards of living since both are affected by many factors other that changes in prices measured by the index.
• The Consumer Price Index cannot be used to measure difference in price levels between one place and another. It measures only temporal (over time) changes in the prices of goods and services consumed by the target population of a particular area (centre) for which the index is constructed. A higher index for one place does not, therefore, necessarily mean that prices in that place are higher than those in another place with a lower index; it merely means that prices have risen faster in one place than in the other since the respective base-periods. This would be true even if the base-periods happen to be identical. In order to measure relative price levels or even the costliness between different places, a special type of index needs to be constructed. Such indices are called spatial indices of comparative costliness.
• The movement of the Consumer Price Index cannot also be compared with the movement of Wholesale Price Index mainly because there are structural differences in the two series and moreover, the impact of wholesale price variations need not necessarily be reflected in retail prices concurrently (which alone are utilized in the compilation of Consumer Price Index Numbers).

Difference between WPI and CPI

TRENDS IN INFLATION

The average CPI-combined (CPI-C) inflation declined to 4.5 per cent in 2016-17 from 4.9 per cent in 2015-16 and 5.9 per cent in 2014- 15. Average inflation for FY 2017-18 (Apr-Dec) stood at 3.3 per cent, below the threshold of 4 per cent. The decline in the inflation in the first half of the current fiscal year was indicative of a benign food inflation which ranged between (-)2.1 to 1.5 per cent. The moderate inflation rate of less than 4 per cent was maintained for straight 12 months up to the end of October 2017 (Figure 1). The CPI-C inflation for the month of December, 2017 stood at 5.2 per cent as compared to 4.9 per cent in November, 2017 and 3.4 per cent in December, 2016.

Food Inflation:

Good agricultural production coupled with regular price monitoring by the Government helped to contain inflation, especially food inflation. CFPI declined to 4.2 per cent in 2016-17 from 4.9 per cent in 2015-16 and 6.4 per cent in 2014-15. Average food inflation for the financial year 2017-18 (Apr- Dec) declined to a low of 1.2 per cent and stood at 5.0 per cent in December, 2017. The rise in food inflation in recent months is mainly due to factors driving prices of vegetables and fruits. Though decline in food inflation is broad-based, major drivers are meat & fish, oil & fats, spices and pulses & products. Pulses & products sub-group with a weight of 2.4 in CPI-C has recorded inflation of (-)22.1 per cent in FY 2017-18 (Apr- Dec) as compared to 16.2 per cent during the same period last year.

Vegetables accounting for 6.04 weight in overall CPI-C recorded inflation of 2.4 per cent during 2017-18 (Apr- Dec).  Food inflation based on WPI has also declined, it averaged 2.3 per cent in FY 2017- 18 (Apr-Dec) as compared to 6.3 per cent in FY 2016-17 (Apr- Dec). WPI of Food Articles and Food Products has also shown decline in FY 2017- 18 (Apr- Dec) over the corresponding period of the previous FY. WPI Food inflation stood at 2.9 per cent in December, 2017 as compared to 4.1 per cent in November, 2017 and 3.6 per cent in December, 2016.

Core Inflation:

While significant moderation has been witnessed in the headline and food inflation, the CPI based core1 inflation has remained above 4 per cent during the last four financial years. However, it has declined from 4.8 per cent in FY 2016-17 (Apr-Dec) to 4.5 per cent in FY 2017-18 (Apr- Dec) and was 5.2 per cent in December, 2017 (Figure 2). Refined core2 is moving very close to core since the beginning of FY 2017-18, it declined to 4.4 per cent in FY 2017-18 (Apr- Dec) from 5.0 per cent in FY 2016-17 (Apr- Dec). Movements of refined core (excluding housing)3 track the refined core. However, during the current financial year, the wedge between the two has grown following the implementation of the revised house rent allowance for central government employees based on the recommendation of the 7th Central Pay Commission. Refined core (excluding housing) declined to 4.0 per cent in FY 2017-18 (Apr- Dec) from 4.9 per cent in FY 2016-17 (Apr- Dec) and stood at 4.3 per cent in December 2017.

DRIVERS OF INFLATION

At the all India level, CPI-C inflation was driven mainly by food during FY 2016-17 (Apr- Dec). The miscellaneous4 group has contributed the most to it during the current FY 2017-18 (Apr- Dec) (Figure 3). As can be seen in Figure 6, goods inflation (weight of 76.6% in CPI-C) is rising since June 2017 while services (with weight of 23.4%) inflation has remained around 5 per cent. Housing group contributed nearly twice as much to inflation in 2017-18 (Apr- Dec) as compared to 2016-17 (Apr- Dec). Excluding housing, services inflation declined to 3.8 per cent in 2017-18 (Apr- Dec) from 5.0 per cent during the corresponding period last financial year. Contribution of fuel and light group in CPI inflation in 2017-18 (Apr- Dec) was thrice of that in 2016-17 (Apr- Dec).

While food was the main driver of CPI (Rural) inflation in 2016-17 (Apr- Dec), miscellaneous category contributed the most to inflation in rural areas during April-December of the current financial year. The contribution of fuel and light, clothing and footwear and pan, tobacco and intoxicants categories in CPI (Rural) inflation has risen during April to December, 2017 over the same period last year (see Figure 4).

In urban areas, while food was the main driver of inflation during April-December last year, housing sector has contributed the most to CPI (Urban) inflation during April-December in the current financial year, followed by miscellaneous category (see Figure 5).

Broad Trends in Indian Inflation

WPI Inflation (2004-05=100)

The post-reform period after 1991 saw a surge in WPI inflation to double digit figures until 1995-96. This was primarily due to phased opening up of the Indian economy and rise in international fuel prices. By December 1995, inflation declined to almost 6 percent. It remained low for most of the later years due to stable prices of primary articles and food grains. Inflation, again reached a peak of 8.84 percent in September 1998 due to rise in prices of food articles especially vegetables, pulses and edible oils. The year 1999-2000 was again characterized by low inflation and adequate supply of products of daily consumption. Average inflation rate during 2001-02 was 4.7 percent which was the lowest in past 2 decades. There was a record public stock of food grains during this period with Food Corporation of India (FCI), which provided stability to food grain prices. The effect of increase in fuel prices in the previous year’s also evened out. Manufactured product inflation recorded a marginal increase due to the impact of global recession, increased international competition, suppressed domestic demand and industrial slowdown.

All these factors contributed to a low inflation rate in the country. WPI inflation has been on a decelerating trend since September 2004. It is recorded at 5.2 percent in January 2005 with an average inflation of 6.5 percent in 2004-05. Fiscal and monetary measures together led to the easing of inflationary situation by 2005-06. The situation of high inflation in 2006-07 and 2008-09 was aggravated by demand side factors such as high money supply growth that remained above 20 percent for nearly two years. A rise in international crude oil prices and high international commodity prices led by rise in prices of iron and steel, raw cotton and textiles led to an increase in inflation from 7.7 percent in March 2008 to 12.9 percent in August of the same year. The year 2008-09 showed a different inflationary trend because of global slowdown and decline in international commodity prices. WPI inflation declined sharply to 0.3 percent on March 2009 (Figure 2).

This downward trend can be attributed to low administered prices of petroleum products, which turned negative at (-) 6.1% and prices iron and steel which declined to (-) 18.4 percent. During the period 2010-13, rising inflation expectations, hike in vegetable prices as a result of untimely rainfall and rise in international commodity prices led to high inflation. Continuous pressure from increase in wages and protein-food inflation kept WPI inflation high at around 7.5 percent during 2012-13. Inflation during this time reflects a combination of factors such as spill over impact from fiscal imbalances; pass through from exchange rate depreciation and shortfall in supply. WPI inflation measured on year on year basis saw a decline of 4.6 percent in May 2013. This however, increased to 6.5 percent in September 2013 owing to an increase in food and fuel prices (Figure 3).

Increase in prices of food articles have been primarily due to an increase in prices of vegetables. High input costs, rising wages and inelastic supply were responsible for high food inflation which in turn had an adverse impact on inflation expectations. Figure 3 shows that high inflation in 2013-14 and 2014- 15 is largely driven by continued increase in food and fuel group inflation which together has a weight of about 28 percent in WPI. Decline in WPI inflation was observed in second and third quarters of 2014-15 and it declined to 3.9 percent and 0.5 percent respectively. WPI declined by 0.4 percent in January 2015 as compared to January 2014. As fuel has larger weight in WPI, the decline in fuel prices led to a sharper reduction in WPI (Figure 2). The average WPI inflation declined to (-) 2.6 percent in 2015-16 from 2.0 percent in 2014-15 due to weak global commodity prices especially crude oil and also due to adverse base effect. Owing to increase in global energy prices and prices of metals, WPI inflation averaged at 3.1 percent for the year 2016-17.

CPI Inflation:

CPI-IWCPI inflation peaked at 13.2 percent in 1998. The uptrend was contributed by an increase in prices of food products such as pulses, vegetables, and edible oils. CPI-IW inflation averaged at around 6 percent from 2000-2006 and 9 percent from 2006-2013. After peaking at 12.1 percent year-on-year growth in November 2013, CPI-IW inflation collapsed to 4.3 percent in December 2014. It again accelerated to 5 percent in October 2015. The disinflation over 2016-17, has been accompanied by a fall in the global oil and commodity prices, a sharp fall in global food prices, a new monetary policy regime aimed at anchoring inflation expectations, a new government working on alleviating food supply bottlenecks, and continued restraint on agricultural support prices. Figure 4 shows the drivers of CPI-IW inflation in recent years.

CPI Inflation: CPI-Combined

The new all-India CPI was close to double-digit between 2012 and 2014, averaging 10.1 percent in 2012-13 and 9.8percent in 2013-14. Since then, however, there has been a dramatic plunge. Average inflation fell to 6 percent in 2014-15 – 400 bpsk lower than the previous two years. And in 2015-16, it is another 140 bps lower, averaging 4.6 percent between April and October. The momentum of inflation, measured by the annualized quarterly growth in the seasonally adjusted CPI has also declined from 12.9 percent during the last quarter of 2013 to just 2.9 percent quarter-on-quarter, from August-October 2015.

Figure 5 depicts that the divergence between WPI and CPI is also evident in the new indices that is CPI Combined and WPI with base 2011-12. This divergence between the two indices is witnessed recently during January 2015 to mid-2016.CPI Inflation decreases to 8.1 percent in February 2014 from 11.2 percent in November 2013 due to decrease in vegetable prices. Cereals and products posted a significant decrease at 9.9 percent in February 2014 from 12 percent in November 2013. Food and beverages group which has an overall weight of 47.6 percent in CPI combined has contributed significantly to overall CPI inflation during April 2012 to December 2013. Inflation in this segment decreases markedly from 14.7 percent in November 2013 to 8.6 percent in February 2014 due to decrease in vegetables and sugar prices.

Entire process was driven by food prices. CPI inflation excluding food and fuel remained high and persistent at 8 percent in Feb 2014 as compared to 8.1 percent in Jan 2014 (Figure 6). High inflation with respect to CPI services reflected the role of wage pressures and other second round effects.

Gap between CPI-IW and WPI Inflation based on Calendar Year Averages