Inflation is measured “point to point”, meaning that the reference dates for calculating the rate remain the same, such as Year-on-Year (YoY) or sequentially on a monthly or quarterly basis.
1. Producer Price Index (PPI)
The PPI measures price changes from the perspective of the producer while selling goods and services in the wholesale market.
- Calculations: It can be measured as Input PPI (costs of commodities entering production) or Output PPI (price of goods leaving production)
- Scope: It primarily captures the cost of raw materials and excludes taxes, trade margins, and transport costs
- Usage: While used by OECD nations, it is not used in India to measure inflation.
2. Wholesale Price Index (WPI)
The WPI tracks the weighted average of prices for a representative basket of wholesale goods before they are sold at retail.
- Basket Composition: It covers 697 commodities classified into three categories: Primary Articles, Fuel and Power, and Manufactured Products.
- Exclusions: Crucially, the WPI does not include services and does not account for indirect taxes, making it less sensitive to government fiscal policy changes.
- Reporting: It is released by the Office of Economic Advisor (Ministry of Commerce and Industry) using 2011-12 as the base year.
3. Consumer Price Index (CPI)
The CPI measures inflation at the retail level or the point of consumption.
- Scope: Unlike the WPI, the CPI includes both goods and services.
- Segmentation: Because consumption patterns vary, it is measured for specific groups in India, such as Industrial Workers (CPI-IW), Agricultural Workers (CPI-AL), and Rural/Urban populations.
- Usage: It is the primary tool used by the RBI for inflation targeting and monetary policy decisions. Its base year is 2012 .
4. GDP Deflator
The GDP Deflator is the ratio of GDP at current prices to GDP at constant prices.
- Comprehensiveness: It is considered the most comprehensive measure because it covers all final goods and services produced domestically within the economy.
- Limitations: It excludes imported items and is rarely used for short-term policy decisions because the data is only available after a substantial time lag
Comparison: WPI vs. CPI
A divergence often exists between WPI and CPI due to their different weighting systems. The WPI gives a much higher weight to manufactured goods (roughly 64%), whereas the CPI gives more weight to food items. Additionally, the CPI includes indirect taxes, while the WPI does not.
To understand these different measures, you can think of measuring inflation like checking the weather: the PPI is like measuring the temperature at the factory where the thermometer is made; the WPI is like checking the temperature at a central weather station; the CPI is what you actually feel when you step outside your front door; and the GDP Deflator is like a satellite view of the entire planet’s climate over the past year.