Let's first understand- What is inflation? In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation in an economy can be measured based on 3 indexes.
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WPI - Wholesale price index
- WPI focuses on prices of goods (not services) that are brought by the firms at a wholesale level
- It has three major components: primary goods(articles), fuel and power index and manufactured goods
- Primary goods(articles) carry a weight of 20.12%, 'fuel and power' 14.91% and manufactured products 64.97%.
- In all WPI consists of total 1224 commodities and the list and their respective weightages.
Shortcomings
- Not globally comparable as countries either have a producer price index or a consumer price index, that is used by central bank.
- Only has goods, and excludes services (contributes 56% to India’s GDP), a huge part of the economy, which directly affect prices of all other things
- Most of the prices are captured through mandis or places where wholesale transactions take place
- These rates do not reflect the prices consumers pay for goods
CPI - Consumer price index
- CPI focuses on prices of goods and services that are paid by the final consumer at a retail level
- India currently has four indices that measure changes in prices of goods and services paid by the final consumer
- They are: CPI for rural laborers, agricultural laborers and industrial workers, and (the latest) all-India consumer price index
Shortcomings
- The indices for rural laborers, agricultural laborers and industrial workers are too narrowly targeted to be used for macro policy formulation
- The all-India CPI, which has been divided between urban and rural areas, gives the most accurate picture of prices but has very limited history as it was started in January last year
PPI - Producers price index
- Producers price index focuses on prices of goods and services that are received by the producer
- This is different from the retail prices, which include shipping costs, taxes and other levies
Why 3 different indexes
- WPI – Does not include service industry which contributes ~56% to the GDP ($4.515 Trillion)
- CPI – Helps to measure the price of goods and services at a retail level/last stage
- PPI – It completes the loop by also measuring the prices of goods and services at the first stage
Who proposed PPI in India?
- Reserve Bank governor D Subbarao has said India needs a new gauge of inflation — the producer price index. According to Subbarao, the most widely watched measure of inflation in India, the wholesale price index (WPI), does not include services, which forms a big part of economic activity (contributes 56% to India’s GDP)
How PPI and CPI will help? (An interpretation) Hypothetical Example
Since PPI measures the prices of the goods and services RECEIVED by the PRODUCER and CPI measures the prices of goods and services PAID by the END CONSUMER it will aid the government and RBI to take apt policy decisions. [/sociallocker]
Read more at http://www.thinkomania.com/what-is-wpi-cpi-ppi/#Cg5Su13RPMXegF6q.99
