Description
The conceptual issues in the measurement of inflation, Divergence between WPI and CPI.
Measures of inflation in India Disparities
Presentation by________________________________________________________
What is inflation?
• “Inflation is the form of taxation which the public find hardest to evade.” - Keynes • Inflation is a sustained increase in the overall level of prices.
• Price stability is a key objective of monetary policy
• Prices of specific goods or services change relative to the prices of others reflecting changes in productivity or demand and supply conditions. • overall increase in price level leads to
– Erosion of purchasing power of income – A rise in the cost of living – Reduction in the real value of savings.
Inflation measures: conceptual issues
• 1861: Release of Index of Indian Prices • Currently, there are five different primary measures of inflation – the Wholesale Price Index (WPI) and four measures of the Consumer Price Index (CPI). • In addition, Gross Domestic Product (GDP) deflator and Private Final Consumption Expenditure (PFCE) deflator from the National Accounts Statistics (NAS) provide implicit economy-wide inflation estimate.
Divergence between WPI and CPI
• They differ in terms of their weighting pattern • Food has a larger weight in CPI (46 per cent in CPI-IW to 69 per cent in CPI-AL )whereas it has a weight of only 27 per cent in WPI
• The fuel group has a much higher weight in the WPI (14.2 per cent) than the CPIs (5.5 to 8.4 per cent)
• Services are not covered under WPI while they are, to different degrees, covered under CPIs
The reasons for divergence
• The price of minerals and metals went up sharply during May–June 2008 and then fell precipitously reflecting global trends • Rise in the price of crude along the same time • Services – medical care, education, recreation and amusement, transport and communication and personal care and effects – in CPI-IW showed a significant inflation of over 8 per cent
Way forward
• The divergence between alternative inflation measures complicates the conduct of monetary policy in India. • RBI looks at all the measures of inflation, both overall and disaggregated components, in conjunction with other economic and financial indicators, to assess the underlying inflationary conditions • In the context of monetary policy formulation, it is important to have a robust primary measure of inflation at the national level. • Compilation of CPI (Urban) and CPI (Rural) could pave the way for a representative CPI for the country
Thank You
doc_298237256.pptx
The conceptual issues in the measurement of inflation, Divergence between WPI and CPI.
Measures of inflation in India Disparities
Presentation by________________________________________________________
What is inflation?
• “Inflation is the form of taxation which the public find hardest to evade.” - Keynes • Inflation is a sustained increase in the overall level of prices.
• Price stability is a key objective of monetary policy
• Prices of specific goods or services change relative to the prices of others reflecting changes in productivity or demand and supply conditions. • overall increase in price level leads to
– Erosion of purchasing power of income – A rise in the cost of living – Reduction in the real value of savings.
Inflation measures: conceptual issues
• 1861: Release of Index of Indian Prices • Currently, there are five different primary measures of inflation – the Wholesale Price Index (WPI) and four measures of the Consumer Price Index (CPI). • In addition, Gross Domestic Product (GDP) deflator and Private Final Consumption Expenditure (PFCE) deflator from the National Accounts Statistics (NAS) provide implicit economy-wide inflation estimate.
Divergence between WPI and CPI
• They differ in terms of their weighting pattern • Food has a larger weight in CPI (46 per cent in CPI-IW to 69 per cent in CPI-AL )whereas it has a weight of only 27 per cent in WPI
• The fuel group has a much higher weight in the WPI (14.2 per cent) than the CPIs (5.5 to 8.4 per cent)
• Services are not covered under WPI while they are, to different degrees, covered under CPIs
The reasons for divergence
• The price of minerals and metals went up sharply during May–June 2008 and then fell precipitously reflecting global trends • Rise in the price of crude along the same time • Services – medical care, education, recreation and amusement, transport and communication and personal care and effects – in CPI-IW showed a significant inflation of over 8 per cent
Way forward
• The divergence between alternative inflation measures complicates the conduct of monetary policy in India. • RBI looks at all the measures of inflation, both overall and disaggregated components, in conjunction with other economic and financial indicators, to assess the underlying inflationary conditions • In the context of monetary policy formulation, it is important to have a robust primary measure of inflation at the national level. • Compilation of CPI (Urban) and CPI (Rural) could pave the way for a representative CPI for the country
Thank You
doc_298237256.pptx