From UPSC perspective, the following things are important :
Prelims level : CPI, WPI, Base Year
Mains level : Inflation management
The Labour and Employment Ministry has revised the base year of the Consumer Price Index (CPI) for Industrial Workers (CPI-IW) from 2001 to 2016.
Why such a move?
- This revision reflects the changing consumption pattern, giving more weightage to spending on health, education, recreation and other miscellaneous expenses while reducing the weight of food and beverages.
What is the Consumer Price Index (CPI)?
- The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
- It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.
- The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
- Essentially it attempts to quantify the aggregate price level in an economy and thus measure the purchasing power of a country’s unit of currency.
Types of CPI in India
- CPI in India comprises multiple series classified based on different economic groups.
- There are four series, viz the CPI UNME (Urban Non-Manual Employee), CPI AL (Agricultural Labourer), CPI RL (Rural Labourer) and CPI IW (Industrial Worker).
- While the CPI UNME series is published by the Central Statistical Organisation, the others are published by the Department of Labour.
- From February 2011 the CPI (UNME) released by CSO is replaced as CPI (urban), CPI (rural) and CPI (combined).
How it is different from WPI?
- CPI is different from WPI, or Wholesale Price Index, which measures inflation at the wholesale level.
- While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services.
- WPI measures and tracks the changes in the price of goods before they reach consumers; goods that are sold in bulk and traded between entities or businesses (rather than consumers).
- Even as the WPI is used as a key measure of inflation in some economies, the RBI no longer uses it for policy purposes, including setting repo rates.
- The central bank currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.
Major components of WPI
- Primary articles are a major component of WPI, further subdivided into Food Articles and Non-Food Articles.
- Food Articles include items such as Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc.
- Non-Food Articles include Oil Seeds, Minerals and Crude Petroleum
- The next major basket in WPI is Fuel & Power, which tracks price movements in Petrol, Diesel and LPG
- The biggest basket is Manufactured Goods. It spans across a variety of manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.
- Manufactured Goods basket also includes manufactured food products such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.
Note: WPI has a sub-index called WPI Food Index, which is a combination of the Food Articles from the Primary Articles basket, and the food products from the Manufactured Products basket.
Now try this PYQ from 2014 CSP:
Q.With reference to India, consider the following statements:
- The Wholesale Price Index (WPI) in India is available on a monthly basis only
- As compared to the Consumer Price Index for Industrial Workers (CPI (IW)), the WPI gives less weight to food articles.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Back2Basics: Base Year
- A base year is the first of a series of years in an economic or financial index. It is typically set to an arbitrary level of 100.
- Any year can serve as a base year, but analysts typically choose recent years. They are periodically revised to keep data current in a particular index.
- A base year is used for comparison in the measure of business activity or economic index.
- For example, to find the rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time set.