INFLATIONIn economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates (to mitigate recessions),and encouraging investment in non-monetary capital projects.Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could before hand.Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. However, money supply growth does not necessarily cause inflation. Some economists maintain that under the conditions of a liquidity trap, large monetary injections are like "pushing on a string". Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to changes in the velocity of money supply measures; in particular the MZM ("Money Zero Maturity") supply velocity. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Measures

CPI inflation (year-on-year) in india from 1914 to 2010.The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index. The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer". The inflation rate is the percentage rate of change of a price index over time. It is broader than the CPI and contains a larger basket of goods and services.To illustrate the method of calculation, in January 2007, the Indian. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is

The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical Indian consumers rose by approximately four percent in 2007.

Other widely used price indices for calculating price inflation include the following: Producer price indices: (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index. Commodity price indices: which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee. Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy.Other common measures of inflation are: GDP deflator: is a measure of the price of all the goods and services included in gross domestic product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure. Regional inflation: The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US. Historical inflation: Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology. Asset price inflation: is an undue increase in the prices of real or financial assets, such as stock (equity) and real estate. While there is no widely accepted index of this type, some central bankers have suggested that it would be better to aim at stabilizing a wider general price level inflation measure that includes some asset prices, instead of stabilizing CPI or core inflation only. The reason is that by raising interest rates when stock prices or real estate prices rise, and lowering them when these asset prices fall, central banks might be more successful in avoiding bubbles and crashes in asset prices.[dubious discuss]

Negative impactsHigh or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation.Uncertainty about the future purchasing power of money discourages investment and saving.And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation.With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation. This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.Cost-push inflationHigh inflation can prompt employees to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a wage spiral.[40] In a sense, inflation begets further inflationary expectations, which beget further inflation.HoardingPeople buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods.Social unrest and revoltsInflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the 20102011 Tunisian revolution[41] and the 2011 Egyptian revolution,[42] according to many observers including Robert Zoellick,[43] president of the World Bank. Tunisian president Zine El Abidine Ben Ali was ousted, Egyptian President Hosni Mubarak was also ousted after only 18 days of demonstrations, and protests soon spread in many countries of North Africa and Middle East.

HyperinflationIf inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply goods. Hyperinflation can lead to the abandonment of the use of the country's currency, leading to the inefficiencies of barter.Allocative efficiencyA change in the supply or demand for a good will normally cause its relative price to change, signaling to buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, price changes due to genuine relative price signals are difficult to distinguish from price changes due to general inflation, so agents are slow to respond to them. The result is a loss of allocative efficiency.Shoe leather costHigh inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed in order to carry out transactions this means that more "trips to the bank" are necessary in order to make withdrawals, proverbially wearing out the "shoe leather" with each trip.Menu costsWith high inflation, firms must change their prices often in order to keep up with economy-wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, or implicitly, as with the extra time and effort needed to change prices constantly.Business cyclesAccording to the Austrian Business Cycle Theory, inflation sets off the business cycle. Austrian economists hold this to be the most damaging effect of inflation. According to Austrian theory, artificially low interest rates and the associated increase in the money supply lead to reckless, speculative borrowing, resulting in clusters of malinvestments, which eventually have to be liquidated as they become unsustainable. Positive impacts

Labour-market adjustmentsNominal wages are slow to adjust downwards. This can lead to prolonged disequilibrium and high unemployment in the labor market. Since inflation allows real wages to fall even if nominal wages are kept constant, moderate inflation enables labor markets to reach equilibrium faster. Room to maneuverThe primary tools for controlling the money supply are the ability to set the discount rate, the rate at which banks can borrow from the central bank, and open market operations, which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) in order to stimulate the economy this situation is known as a liquidity trap. A moderate level of inflation tends to ensure that nominal interest rates stay sufficiently above zero so that if the need arises the bank can cut the nominal interest rate. MundellTobin effectThe Nobel laureate Robert Mundell noted that moderate inflation would induce savers to substitute lending for some money holding as a means to finance future spending. That substitution would cause market clearing real interest rates to fall. The lower real rate of interest would induce more borrowing to finance investment. In a similar vein, Nobel laureate James Tobin noted that such inflation would cause businesses to substitute investment in physical capital (plant, equipment, and inventories) for money balances in their asset portfolios. That substitution would mean choosing the making of investments with lower rates of real return. (The rates of return are lower because the investments with higher rates of return were already being made before. The two related effects are known as the MundellTobin effect. Unless the economy is already overinvesting according to models of economic growth theory, that extra investment resulting from the effect would be seen as positive.Instability with deflationEconomist S.C. Tsaing noted that once substantial deflation is expected, two important effects will appear; both a result of money holding substituting for lending as a vehicle for saving.The first was that continually falling prices and the resulting incentive to hoard money will cause instability resulting from the likely increasing fear, while money hoards grow in value, that the value of those hoards are at risk, as people realize that a movement to trade those money hoards for real goods and assets will quickly drive those prices up. Any movement to spend those hoards "once started would become a tremendous avalanche, which could rampage for a long time before it would spend itself."Thus, a regime of long-term deflation is likely to be interrupted by periodic spikes of rapid inflation and consequent real economic disruptions. Moderate and stable inflation would avoid such a seesawing of price movements.Financial market inefficiency with deflationThe second effect noted by Tsaing is that when savers have substituted money holding for lending on financial markets, the role of those markets in channeling savings into investment is undermined. With nominal interest rates driven to zero, or near zero, from the competition with a high return money asset, there would be no price mechanism in whatever is left of those markets. With financial markets effectively euthanized, the remaining goods and physical asset prices would move in perverse directions. For example, an increased desire to save could not push interest rates further down (and thereby stimulate investment) but would instead cause additional money hoarding, driving consumer prices further down and making investment in consumer goods production thereby less attractive. Moderate inflation, once its expectation is incorporated into nominal interest rates, would give those interest rates room to go both up and down in response to shifting investment opportunities, or savers' preferences, and thus allow financial markets to function in a more normal fashion.Causes of Inflation

Demand-pull inflation: is caused by increases in aggregate demand due to increased private and government spending, etc. This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase.This usually occurs in growing economies. Demand inflation encourages economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. Cost-push inflation: When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports also called "supply shock inflation," is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. Built-in inflation: is induced by adaptive expectations, and is often linked to the "price/wage spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover inflation.Demand-pull theory states that inflation accelerates when aggregate demand increases beyond the ability of the economy to produce (its potential output). Hence, any factor that increases aggregate demand can cause inflation.[51] However, in the long run, aggregate demand can be held above productive capacity only by increasing the quantity of money in circulation faster than the real growth rate of the economy. Another (although much less common) cause can be a rapid decline in the demand for moneyThe effect of money on inflation is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively. This sometimes leads to hyperinflation, a condition where prices can double in a month or less. Money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is..Another concept of note is the potential output (sometimes called the "natural gross domestic product"), a level of GDP, where the economy is at its optimal level of production given institutional and natural constraints. (This level of output corresponds to the Non-Accelerating Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-in inflation worsens. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation.

What Is an Inflation Index?An inflation index is a tool used to measure the rate that prices are increasing or, alternatively, money is losing its value. Economists can use an inflation index to estimate the cost of living for families.An inflation index is a tool used to measure the rate of inflation in an economy. There are several different ways to measure inflation, leading to more than one inflation index with different economists and investors preferring one method to another, sometimes strongly. This brief overview should help you understand how an inflation index works, some of the more popular models, and perhaps even help you decide for yourself the one you think represents the "true" inflation rate.Before we can begin, you need to understand the definition of an "index". Basically, an index is just a collection of data that serves as a baseline for future reference. We use the index model in all areas of life, from the stock market (the most famous of which is probably the Dow Jones Industrial Index), to inflation. We index wage levels, corporate profits as a percentage of GDP, and almost anything else that can be measured. We do this to compare where we are now to where we have been in the past.Some Popular Inflation Index ReportsThere are several popular inflation index reports that investors and economists follow: Consumer Price Index (CPI): This inflation index measures the change in prices regular consumers pay to live their day-to-day lives. Producer Price Index (PPI): This inflation index measures the change in prices manufacturers and producers experience on materials necessary for conducting their business. The price of steel and aluminum for automobile manufacturers would be tracked by the PPI. Employment Cost Index (ECI): This inflation index measures the rising cost of hiring employees in various fields. Gross Domestic Product Deflator (GDP Deflator): This inflation index measures the rise in cost experienced by end consumers as well as the government or institution providing goods and services to those consumers.

The CPI, or Consumer Price Index, is without a doubt the most popular inflation index in the United States. There are several different version of the CPI but they all are built upon the idea of tracking prices for a basket of goods and comparing them to a baseline year. According to the government, The Consumer Price Index covers different categories and items including: Food and Beverages: Milk, coffee, wine, snacks, chicken, breakfast cereal, etc. Housing: Rent, heating oil, bedroom furniture Apparel: Shirts, sweaters, jewelry Transportation: New vehicles, airline fares, car insurance, gasoline Medical Care: Prescription drugs, medical supplies, doctor visits, eyeglasses, hospital bills Recreation and Entertainment: Televisions, toys, pet products, sports equiment, admissions Education and Communication: College tuition, postage, telephone service, computer software Other Goods and Services: Tobacco, haircuts, funeral expenses, etc.

How the Government Updates the Inflation Index

Every month, employees of the Bureau of Labor Statistics visit thousands of retail stores, restaurants, service establishments, apartment buildings, and medical facilities throughout the country and research prices. It is estimated that they sample approximately 80,000 items per month, which is used as the raw data to perform the Consumer Price Index calculations that get reported to the press.The government even reports the inflation index for major metropolitan areas so that you can tell if prices are rising more rapidly in, say, Atlanta than they are Denver.

How to Calculate the Inflation Rate? The formula for calculating the Inflation Rate using the Consumer Price Index (CPI) is relatively simple. Every month the Bureau of Labor Statistics (BLS) surveys thousands of prices all over the country and generates the current Consumer Price Index (CPI). Assume for the sake of simplicity that the index consists of one item and that in 1984 that item cost $1.00. The BLS pegged the index in 1984 at 100* (see Footnote). In January of 2006 that same item would probably cost $1.98 and today it would cost even more. But let's calculate the price difference between 1984 and 2006.Step 1: Calculate- How Much has the Consumer Price Index Increased?By looking at the above example, common sense would tell us that the index increased (it went from 100 to 198). The question is how much has it increased? To calculate the change we would take the second number (198) and subtract the first number (100). The result would be 98. So we know that from 1984 until 2006 prices increased (Inflated) by 98 points.But, what good does knowing that it moved 98 points do? Well, we know that prices almost doubled in 22 years, since it was 100 1984 and in 2006 it is almost 200 but other than that we don't know much. We still need something to compare it to.Step 2: Comparing the CPI Change to the Original CPISince we know the increase in the Consumer Price Index we still need to compare it to something, so we compare it to the price it started at (100). We do that by dividing the increase by the first price or 98/100. the result is (.98).

Step 3: Convert it to a PercentThis number is still not very useful so we convert it into a percent. To do that we multiply by 100 and add a % symbol. .98 x 100= 98So the result is a 98% increase in prices since 1984. That is interesting but (other than being the date of George Orwell's famous novel) to most people today 1984 is not particularly significant. Calculating the Inflation Rate Over a Specific Time PeriodNormally, we want to know how much prices have increased since last year, or since we bought our house, or graduated College (or High School) or perhaps how much prices will increase by the time we retire or our kids go to college.Fortunately, The method of calculating Inflation is the same, no matter what time period we desire. We just substitute a different value for the first one. So if we want to know how much prices have increased over the last 12 months (the commonly published inflation rate number) we would subtract last year's Consumer Price Index from the current index and divide by last year's number and multiply the result by 100 and add a % sign. The formula for calculating the Inflation Rate looks like this:((B - A)/A)*100Where "A" is the Starting number and "B" is the ending number.So if exactly one year ago the Consumer Price Index was 178 and today the CPI is 185, then the calculations would look like this:((185-178)/178)*100 or(7/178)*100 or0.0393*100 which equals 3.93% inflation over the sample year. (Not Actual Inflation Rates). To calculate the Current Inflation Rate it uses the most recently released CPI data and compares it to data from exactly 12 months prior using the above formula. To find the CPI index on more than the current date you can check the current Consumer Inflation Rate or Historical Inflation Rates in table format. What happens if prices Go down?If prices go down and we experienced Price Deflation then "A" would be larger than "B" and we would end up with a negative number. So if last year the Consumer Price Index (CPI) was 189 and this year the CPI is 185 then the formula would look like this:((185-189)/189)*100 or(-4/189)*100 or-0.0211*100 which equals negative inflation over the sample year of -2.11%. Of course negative inflation is called deflation.Calculating Inflation When it is Over 100%In April of 2006 the CPI index crossed the 200 mark so inflation was now over 100% so calculating it became a bit more confusing (but the formula is still the same). Typically when the index crosses over 100% the BLS just sets a new base year making some arbitrary date now equal to 100 and adjusting all the previous dates accordingly. But so far they haven't done that yet.In September of 2012 the CPI index was 231.407 so if we wanted to calculate the amount of inflation from 1984 until September of 2012, we would take (231.407 - 100)/100 = 1.31407 or 131.407%. So prices inflated by 131.4% in that time period. The calculations are the same but we have to remember that the 131% increase is on top of the original price. 100% inflation means prices doubled. 200% inflation means prices tripled, etc. Somehow it just seems less confusing when total inflation is less than 100%.A consumer price index (CPI): measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."[1]The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indexes and sub-sub-indexes are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.IntroductionTwo basic types of data are needed to construct the CPI: price data and weighting data. The price data are collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times. The weighting data are estimates of the shares of the different types of expenditure in the total expenditure covered by the index. These weights are usually based upon expenditure data obtained from expenditure surveys for a sample of households or upon estimates of the composition of consumption expenditure in the National Income and Product Accounts. Although some of the sampling of items for price collection is done using a sampling frame and probabilistic sampling methods, many items and outlets are chosen in a commonsense way (purposive sampling) that does not permit estimation of confidence intervals. Therefore, the sampling variance cannot be calculated. In any case, a single estimate is required in most of the purposes for which the index is used.The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, clothing, each of which is in turn a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, (for example, men's shirts sold in department stores in San Francisco), detailed weighting information is unavailable, so indices are computed using an unweighted arithmetic or geometric mean of the prices of the sampled product offers. (However, the growing use of scanner data is gradually making weighting information available even at the most detailed level.) These indices compare prices each month with prices in the price-reference month. The weights used to combine them into the higher-level aggregates, and then into the overall index, relate to the estimated expenditures during a preceding whole year of the consumers covered by the index on the products within its scope in the area covered. Thus the index is a fixed-weight index, since the weight-reference period of a year and the price-reference period, usually a more recent single month, do not coincide. It takes time to assemble and process the information used for weighting which, in addition to household expenditure surveys, may include trade and tax data.Ideally, the weights would relate to the composition of expenditure during the time between the price-reference month and the current month. There is a large technical economics literature on index formulae which would approximate this and which can be shown to approximate what economic theorists call a true cost of living index. Such an index would show how consumer expenditure would have to move to compensate for price changes so as to allow consumers to maintain a constant standard of living. Approximations can only be computed retrospectively, whereas the index has to appear monthly and, preferably, quite soon. Nevertheless, in some countries, notably in the United States and Sweden, the philosophy of the index is that it is inspired by and approximates the notion of a true cost of living (constant utility) index, whereas in most of Europe it is regarded more pragmatically.The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice; the rural population may or may not be included; certain groups such as the very rich or the very poor may be excluded. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance.The index reference period, usually called the base year, often differs both from the weight-reference period and the price reference period. This is just a matter of rescaling the whole time-series to make the value for the index reference-period equal to 100. Annually revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period.Calculating the CPI for a single itemCurrent item price ($) = (base year price) * (Current CPI) / (Base year CPI)or

Where 1 is usually the comparison year and CPI1 is usually an index of 100.Alternatively, the CPI can be performed as . The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread in 2010) is divided by the initial year (the price of bread in 1970), then multiplied by one hundred.[2]Calculating the CPI for multiple items[edit]Many but not all price indices are weighted averages using weights that sum to 1 or 100.Example: The prices of 95,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI computation.[3]

where the s sum to 1 or 100.

WeightingWeights and sub-indicesBy convention weights are fractions or ratios summing to one, as percentages summing to 100 or as per mille numbers summing to 1000.On the European Union's Harmonised Index of Consumer Prices (HICP), for example, each country computes some 80 prescribed sub-indices, their weighted average constituting the national HICP. The weights for these sub-indices will consist of the sum of the weights of a number of component lower level indices. The classification is according to use, developed in a national accounting context. This is not necessarily the kind of classification that is most appropriate for a Consumer Price Index. Grouping together of substitutes or of products whose prices tend to move in parallel might be more suitable.For some of these lower level indexes detailed reweighing to make them be available, allowing computations where the individual price observations can all be weighted. This may be the case, for example, where all selling is in the hands of a single national organisation which makes its data available to the index compilers. For most lower level indexes, however, the weight will consist of the sum of the weights of a number of elementary aggregate indexes, each weight corresponding to its fraction of the total annual expenditure covered by the index. An 'elementary aggregate' is a lowest-level component of expenditure, one which has a weight but within which, weights of its sub-components are usually lacking. Thus, for example: Weighted averages of elementary aggregate indexes (e.g. for men's shirts, raincoats, women's dresses, etc.) make up low level indexes (e.g. Outer garments).Weighted averages of these in turn provide sub-indices at a higher, more aggregated level,(e.g. clothing) and weighted averages of the latter provide yet more aggregated sub-indices (e.g. Clothing and Footwear).Some of the elementary aggregate indexes, and some of the sub-indexes can be defined simply in terms of the types of goods and/or services they cover, as in the case of such products as newspapers in some countries and postal services, which have nationally uniform prices. But where price movements do differ or might differ between regions or between outlet types, separate regional and/or outlet-type elementary aggregates are ideally required for each detailed category of goods and services, each with its own weight. An example might be an elementary aggregate for sliced bread sold in supermarkets in the Northern region.Most elementary aggregate indexes are necessarily 'unweighted' averages for the sample of products within the sampled outlets. However, in cases where it is possible to select the sample of outlets from which prices are collected so as to reflect the shares of sales to consumers of the different outlet types covered, self-weighted elementary aggregate indexes may be computed. Similarly, if the market shares of the different types of product represented by product types are known, even only approximately, the number of observed products to be priced for each of them can be made proportional to those shares.Estimating weightsThe outlet and regional dimensions noted above mean that the estimation of weights involves a lot more than just the breakdown of expenditure by types of goods and services, and the number of separately weighted indexes composing the overall index depends upon two factors:1. The degree of detail to which available data permit breakdown of total consumption expenditure in the weight reference-period by type of expenditure, region and outlet type.2. Whether there is reason to believe that price movements vary between these most detailed categories.How the weights are calculated, and in how much detail, depends upon the availability of information and upon the scope of the index. In the UK the Retail Price Index(RPI) does not relate to the whole of consumption, for the reference population is all private households with the exception of a) pensioner households that derive at least three-quarters of their total income from state pensions and benefits and b) "high income households" whose total household income lies within the top four per cent of all households. The result is that it is difficult to use data sources relating to total consumption by all population groups.For products whose price movements can differ between regions and between different types of outlet: The ideal, rarely realisable in practice, would consist of estimates of expenditure for each detailed consumption category, for each type of outlet, for each region. At the opposite extreme, with no regional data on expenditure totals but only on population (e.g. 24% in the Northern region) and only national estimates for the shares of different outlet types for broad categories of consumption (e.g. 70% of food sold in supermarkets) the weight for sliced bread sold in supermarkets in the Northern region has to be estimated as the share of sliced bread in total consumption 0.24 0.7.The situation in most countries comes somewhere between these two extremes. The point is to make the best use of whatever data are available.The nature of the data used for weightingNo firm rules can be suggested on this issue for the simple reason that the available statistical sources differ between countries. However, all countries conduct periodical Household Expenditure surveys and all produce breakdowns of Consumption Expenditure in their National Accounts. The expenditure classifications used there may however be different. In particular: Household Expenditure surveys do not cover the expenditures of foreign visitors, though these may be within the scope of a Consumer Price Index. National Accounts include imputed rents for owner-occupied dwellings which may not be within the scope of a Consumer Price Index.Even with the necessary adjustments, the National Account estimates and Household Expenditure Surveys usually diverge.The statistical sources required for regional and outlet-type breakdowns are usually weaker. Only a large-sample Household Expenditure survey can provide a regional breakdown. Regional population data are sometimes used for this purpose, but need adjustment to allow for regional differences in living standards and consumption patterns. Statistics of retail sales and market research reports can provide information for estimating outlet-type breakdowns, but the classifications they use rarely correspond to COICOP categories.The increasingly widespread use of bar codes, scanners in shops has meant that detailed cash register printed receipts are provided by shops for an increasing share of retail purchases. This development makes possible improved Household Expenditure surveys, as Statistics Iceland has demonstrated. Survey respondents keeping a diary of their purchases need to record only the total of purchases when itemised receipts were given to them and keep these receipts in a special pocket in the diary. These receipts provide not only a detailed breakdown of purchases but also the name of the outlet. Thus response burden is markedly reduced, accuracy is increased, product description is more specific and point of purchase data are obtained, facilitating the estimation of outlet-type weights.There are only two general principles for the estimation of weights: use all the available information and accept that rough estimates are better than no estimates.ReweightingIdeally, in computing an index, the weights would represent current annual expenditure patterns. In practice they necessarily reflect past using the most recent data available or, if they are not of high quality, some average of the data for more than one previous year. Some countries have used a three-year average in recognition of the fact that household survey estimates are of poor quality. In some cases some of the data sources used may not be available annually, in which case some of the weights for lower level aggregates within higher level aggregates are based on older data than the higher level weights.Infrequent reweighing saves costs for the national statistical office but delays the introduction into the index of new types of expenditure. For example, subscriptions for Internet Service entered index compilation with a considerable time lag in some countries, and account could be taken of digital camera prices between re-weightings only by including some digital cameras in the same elementary aggregate as film cameras.Owner-occupiers and the price indexThe way in which owner-occupied dwellings should be dealt with in a Consumer Price Index has been, and remains, a subject of heated controversy in many countries. Various approaches have been considered, each with their advantages and disadvantages.The economists' approachLeaving aside the quality of public services, the environment, crime and so forth, and regarding the standard of living as a function of the level and composition of individuals consumption, this standard depends upon the amount and range of goods and services they consume. These include the service provided by rented accommodation, which can readily be priced, and the similar services yielded by a flat or house owned by the consumer who occupies it. Its cost to a consumer is, according to the economic way of thinking, an opportunity cost, namely what he or she sacrifices by living in it. This cost, according to many economists, is what should form a component of a Consumer Price Index.Opportunity cost can be looked at in two ways, since there are two alternatives to continuing to live in an owner-occupied dwelling. One supposing that it is one years cost that is to be considered is to sell it, earn interest on the owners capital thus released, and buy it back a year later, making an allowance for its physical depreciation. This can be called the alternative cost approach. The other, the rental equivalent approach, is to let it to someone else for the year, in which case the cost is the rent that could be obtained for it. Most people do not think about their dwelling in either of these ways, but this does not bother the theoretical economist for whom consistent logic is what matters.There are, of course, practical problems in implementing either of these economists approaches. Thus, with the alternative cost approach, if house prices are rising fast the cost can be negative and then become sharply positive once house prices start to fall, so such an index would be very volatile. On the other hand, with the rental equivalent approach, there may be difficulty in estimating the movement of rental values of types of property which are not actually rented. If one or other of these measures of the consumption of the services of owner-occupied dwellings is included in consumption, then it must be included in income too, for income equals consumption plus saving. This means that if the movement of incomes is to be compared with the movement of the Consumer Price Index, incomes must be expressed as money income plus this imaginary consumption value. That is logical, but it may not be what users of the index want.Although the argument has been expressed in connection with owner-occupied dwellings, the logic applies equally to all durable consumer goods and services. Furniture, carpets and domestic appliances are not used up soon after purchase in the way that food is. Like dwellings, they yield a consumption service that can continue for years. Furthermore, since strict logic is to be adhered to, there are durable services as well that ought to be treated in the same way; the service consumers derive from appendectomies or crowned teeth continue for a long time. Since estimating values for these components of consumption has not been tackled, the economic theorists are torn between their desire for intellectual consistency and their recognition that inclusion of the opportunity cost of the use of durables is impracticable.SpendingAnother approach is to concentrate on spending. Everyone agrees that repairs and maintenance expenditure of owner-occupied dwellings should be covered in a Consumer Price Index, but the spending approach would include mortgage interest too. This turns out to be quite complicated, conceptually as well as in practice.To explain what is involved, consider a Consumer Price Index computed with reference to 2009 for just one sole consumer who bought her house in 2006, financing half of this sum by raising a mortgage. The problem is to compare how much interest such a consumer would now be paying with the interest that was paid in 2009. Since the aim is to compare like with like, that requires an estimate of how much interest would be paid now in the year 2010 on a similar house bought and 50% mortgage-financed three years ago, in 2007. It does not require an estimate of how much that identical person is paying now on the actual house she bought in 2006, even though that is what personally concerns her now.A Consumer Price Index compares how much it would cost now to do exactly what consumers did in the reference-period with what it cost then. Application of the principle thus requires that the index for our one house owner should reflect the movement of the prices of houses like hers from 2006 to 2007 and the change in interest rates. If she took out a fixed-interest rate mortgage it is the change in interest rates from 2006 to 2007 that counts; if she took out a variable interest mortgage it is the change from 2009 to 2010 that counts. Thus her current index with 1999 as reference-period will stand at more than 100 if house prices or, in the case of a fixed-interest mortgage, interest rates rose between 2006 and 2007.The application of this principle in the owner-occupied dwellings component of a Consumer Price Index is known as the debt profile method. It means that the current movement of the index will reflect past changes in dwelling prices and interest rates. Some people regard this as odd. Quite a few countries use the debt profile method, but in doing so most of them behave inconsistently. Consistency would require that the index should also cover the interest on consumer credit instead of the whole price paid for the products bought on credit if it covers mortgage interest payments. Products bought on credit would then be treated in the same way as owner-occupied dwellings.Variants of the debt profile method are employed or have been proposed. One example is to include down payments as well as interest. Another is to correct nominal mortgage rates for changes in dwelling prices or for changes in the rest of the Consumer Price Index to obtain a real rate of interest. Also, other methods may be used alongside the debt profile method. Thus several countries include a purely notional cost of depreciation as an additional index component, applying an arbitrarily estimated, or rather guessed, depreciation rate to the value of the stock of owner-occupied dwellings. Finally, one country includes both mortgage interest and purchase prices in its index.Transaction pricesThe third approach simply treats the acquisition of owner-occupied dwellings in the same way as acquisitions of other durable products are treated. This means: Taking account of the transaction prices agreed; Ignoring whether payments are delayed or are partly financed by borrowing; Leaving out second-hand transactions. Second-hand purchases correspond to sales by other consumers. Thus only new dwellings would be included.Furthermore, expenditure on enlarging or reconstructing an owner-occupied dwelling would be covered, in addition to regular maintenance and repair. Two arguments of an almost theological character are advanced in connection with this transactions approach.One argument is that purchases of new dwellings are treated as Investment in the System of National Accounts, so should not enter a consumption price index. It is said that this is more than just a matter of terminological uniformity. For example it may be thought to help understanding and facilitate economic analysis if what is included under the heading of Consumption is the same in the Consumer Price Index and in the national income and expenditure accounts. Since these accounts include the equivalent rental value of owner-occupied dwellings, the equivalent rental approach would have to be applied in the Consumer Price Index too. But the national accounts do not apply it to other durables, so the argument demands consistency in one respect but accepts its rejection in another.The other argument is that the prices of new dwellings should exclude that part reflecting the value of the land, since this is an irreproducible and permanent asset that cannot be said to be consumed. This would presumably mean deducting site value from the price of a dwelling, site value presumably being defined as the price the site would fetch at auction if the dwelling were not on it. How this is to be understood in the case of multiple dwellings remains unclear.ConfusionIt is apparent that much of the muddle in discussing the merits of the different approaches arises from the promiscuous mixing up of arguments about feasibility, about dislike or approval of the way the index would move under a particular approach and about principles of various, often incompatible, sorts. Feasibility is naturally important. The difficulty of dealing with site values is obvious.Statisticians in a country lacking a good dwelling price index (which is required for all except the rental equivalent method) will go along with a proposal to use such an index only if they can obtain the necessary additional resources that will enable them to compile one. Even obtaining mortgage interest rate data can be a major task in a country with a multitude of mortgage lenders and many types of mortgage. Dislike of the effect upon the behaviour of the Consumer Price Index arising from the adoption of some methods can be a powerful, if sometimes unprincipled, argument.Dwelling prices are volatile and so, therefore, would be an index incorporating the current value of a dwelling price sub-index which, in some countries, would have a large weight under the third approach. Furthermore, the weight for owner-occupied dwellings could be altered considerably when reweighting was undertaken. (It could even become negative under the alternative cost approach if weights were estimated for a year during which house prices had been rising steeply).Then, there is the point that a rise in interest rates designed to halt inflation could paradoxically make inflation appear higher if current interest rates showed up in the index. Economists principles are not acceptable to all; nor is insistence upon consistency between the treatment of owner-occupied dwellings and other durables.The three approaches should not be regarded as rivals, they are different answers to different questions. One, or possibly more, should be chosen. The three questions can be formulated as follows:1. Opportunity cost. What is the change through time in what would be the opportunity cost of the reference-period consumption of the services of owner-occupied dwellings?2. Spending. What is the change through time in the cash outlays that would correspond to the reference-period cash outlays in respect of owner-occupied dwellings?3. Transactions. What is the change through time in what would be the purchase value of the reference-period net acquisition of owner-occupied dwellings by consumers?Which question is to be answered is, as just stated, a policy matter, depending upon the purposes the index is to serve. It is not an issue for statisticians to decide. Their job is the technical, professional one of compiling one or more indexes that answer the selected question or questions as well as possible, given the resources at their disposal. In a perfect world this is how the owner-occupied dwellings issue would be resolved. But the world is not perfect.How Inflation is Measured in India:Inflation is usually measured based on certain indices. Broadly, there are two categories of indices for measuring inflation i.e. Wholesale Prices and Consumer Prices. There are certain sub-categories for these indices.

What is an Index Number : An Index number is a single figure that shows how the whole set of related variables has changed over time or from one place to another. In particular, a price index reflects the overall change in a set of prices paid by a consumer or a producer, and is conventionally known as a Cost-of-Living index or Producer's Price Index as the case may be.Price Indexes / Indices used in India :In India we use five major national indices for measuring inflation or price levels. (A) The Wholesale Price Index (base 1993-94) is usually considered as the headline inflation indicator in India. (B) In addition to Whole Price Index ( WPI ), there are four different consumer price indices which are used to assess the inflation for different sections of the labour force. These are discussed in more details later on. (C) In addition to above five indices, the GDP deflator as an indicator of inflation is available for the economy as a whole and its different sectors, on a quarterly basisProducer Price Indexes (PPI) These are indices that measure the average change over time in selling prices by producers of goods and services. They measure price change from the point of view of the seller. Majority of OECD countries measure inflation based on Producer Price Indiex (PPI) while only some others use WPI. Countries like Japan, Greece, Norway and Turkey use WPI. Already WPI has been replaced in most of the countries by PPI due to the broader coverage provided by the PPI in terms of products and industries and the conceptual concordance between PPI and system the national account. PPI is considered to be more relevant and technically superior compared to one at wholesale level. However, in India we are still continuing with WPI.

Cost-of-living indices (COLI)This is different from CPI. This index aims to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare) as distinct from maintaining the urchasing power to buy a fixed consumption basket of good and services. Maintaining a constant standard of living does not imply continuing to consume a fixed basket of goods and services. A COLI allows for the fact that households who seek to maximize their welfare from a given expenditure can benefit by adjusting their expenditure patterns to take account of changing relative prices by substituting goods that have become relatively cheaper, for goods that have become relatively dearer. The use or preference for a particular goods may also change.

Definition of 'Consumer Price Index - CPI'

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price change associated with the cost of living.

The U.S. Bureau of Labor Statistics measures two kinds of CPI statistics: CPI for urban wage earners and clerical workers (CPI-W), and the chained CPI for all urban consumers (C-CPI-U). Of the two types of CPI, the C-CPI-U is a better representation of the general public, because it accounts for about 87% of the population.

CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.Consumer Price Index (CPI) The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual. 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. Till January 2012, in India there were only following four CPIs compiled and released on national level. (In some countries like UK, Malaysia, Poland it is also known as Retail Price Index).

(1) Industrial Workers (IW) (base 2001), (2) Agricultural Labourer (AL) (base 1986-87) and (3) Rural Labourer (RL) (base 1986-87) (4) Urban Non-Manual Employees (UNME) (base 1984-85), The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment, and the fourth is compiled by Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation. These four CPIs reflect the effect of price fluctuations of various goods and services consumed by specific segments of population in the country. These indices did not encompass all the segments of the population and thus, did not reflect the true picture of the price behaviour in the country as a whole.

Some of the Data for 2012 for above indices :WPI (All commodities)WPI - Inflation RateCPI (IW)CPI - AL - Point to PointCPI - Rural LabourersCPI - RL - Point to Point

Base Period 2001=100Point Inflation1986-87=100Inflation1986-87=100Inflation

Period

Jan-12158.707.23198.005.32618.004.92619.005.27

Feb-12159.307.56199.007.57621.006.34623.006.68

Mar-12161.007.69201.008.65625.006.84626.007.19

Apr-12163.507.50205.0010.22633.007.84634.008.01

May-12163.907.55206.0010.16638.007.77640.008.11

Jun-12164.207.25208.0010.05646.008.03648.008.54

Jul-12164.806.87212.009.84656.008.61658.008.94

New Series of CPI Started in 2012Therefore, there was a strong feeling that there is a need for compiling CPI for entire urban and rural population of the country to measure the inflation in Indian economy based on CPI. Thus, now Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling a new series of CPI for the (a) CPI for the entire urban population viz CPI (Urban);(b) CPI for the entire rural population viz CPI (Rural)(c) Consolidated CPI for Urban + Rural will also be compiled based on above two CPIsThese would reflect the changes in the price level of various goods and services consumed bythe Urban and rural population. These new indices are now compiled at State / UT and all India levels.The CPI inflation series is wider in scope than the one based on the wholesale price index (WPI), as it has both rural and urban figures, besides state-wise data. The new series, with 2010 as the base year, also includes services, which is not the case with the WPI series. However, this new series will become comparable only in 2013 when the data for 2012 will also be available for comparison.A comparison of this new series with WPI is given below :-WPICPI - New Series wef Feb 2012

Base Year2004-052010

Elemenetary Items676200 (Weighted items)

Weightage o Food products (%) 24349.71

Weightage of Energy products (%)14..919.49

Weightage of Miscellaneous Items (%)Services not included26.31

Some of the Data Released under this New Series :PeriodRural - CPI / Annual Inflation - ProvUrban - CPI / Annual Inflation - Prov.Combined - CPI / Annual Inflation (Prov.)

May 2012119.1117.1118.2

June 2012117.5118.5119.6

July 2012122.69.76%119.910.0%121.49.86%

Every month, government economists at the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor release the latest Consumer Price Index (CPI), which is a measure of the average change over time in the price paid by urban households for a set of consumer goods and services. The expenditure items are classified into some 200 categories that are arranged into eight groups (e.g., food and beverages or medical care). The percent change in the CPI provides a measure of inflation.The CPI reflects the spending patterns of each of two population groups: all-urban consumers and urban wage earners and clerical workers, which include professionals, the self-employed, the unemployed, and poor persons. The all-urban group represents about 87 percent of the U.S. population. The price-change experience of the all-urban consumer group is measured by the traditional Consumer Price Index for All Urban Consumers (CPI-U) and the newer Chained Consumer Price Index for All Urban Consumers (C-CPI-U), the latter of which is closer to a cost-of-living index in that it adjusts for consumers substitutions among expenditure items in reaction to relative price changes. The CPI-W is based on the expenditures of households included in the CPI-U definition that get more than half their income from clerical work and that have at least one earner who has been employed at least 37 weeks during the previous 12 months. The CPI-W's population represents about 32 percent of the total U.S. population, and is a subset of the CPI-U.The CPI is used as an economic indicator, a deflator of other economic series, and a means of adjusting dollar values. While sometimes referred to as a cost-of-living index, the CPI differs in important ways from a complete index because it does not take into account changes in other factors that affect consumer well-being and are difficult to quantify, such as safety, health, water quality, and crime.As described on the BLS Web site, alternative price indices lead to significantly different conclusions regarding price changes over long periods of time. These differences affect conclusions regarding time trends in the population of families with incomes below the poverty line.

How to Calculate CPIThe Consumer Price Index (CPI) is a measure of changes in product costs over a specific time period and involves census data, consumer surveys and rating the products by importance. To calculate a simple CPI, you need only to have a reference period, a new period and the costs of items you use. This guide will help you see how inflation affects your day-to-day expenses.AdStepsMethod 1 of 2: Single Item1. 1Choose one item you purchased in the past. Try to find something that you have an exact number for, and that you have recently purchased as well. This product will be your reference CPI. Write down the price and reference CPI. The starting CPI is always 100: Price 1: $1.50 CPI 1: 100 (1.50 / 1.50 x 100)Ad

2Write down the new price. This is the price you currently pay for the same item: Price 2: $1.75

3Calculate the new CPI. Divide Price 2 by Price 1. Multiply by 100: 1.75 / 1.50 x 100 = 116.6 CPI 2: 116.6

4Subtract CPI 1 from CPI 2. This will give you the percentage change in price since you purchased the original product. If it is a positive number, you are experiencing inflation. If the number is negative, then you are experiencing deflation: 116.6 - 100 = 16.6% inflationMethod 2 of 2: Multiple Items1. 1Choose multiple items that you purchased in the past. Pick items that you purchased around or at the same time. Make sure that theyre items that you have purchased again recently. Write down the price you paid for each item and the reference CPI. The reference CPI is always 100. Then add the prices together: Price 1: $3.25, $3.00, $0.75 Price 1: 3.25 + 3.00 + 0.75 = 7.00 CPI 1: 100 (7.00 / 7.00 x 100)

2Write down the new prices. These are what you currently pay for each of the same items. Then add the prices together: Price 2: $4.00, $3.25, $1.25 Price 2: 4.00 + 3.25 + 1.25 = 8.50

3Calculate the new CPI. Divide Price 2 by Price 1 and multiply by 100. 8.50 / 7.00 x 100 = 121 CPI 2: 121.

4Subtract CPI 1 from CPI 2. This will give you the percentage change in price since you purchased the original products. The more products you can calculate the CPI change of, the more accurate your overview of the economy will be: 121 - 100 = 21% inflation

Wholesale price index

The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. However, United States now report a producer price index instead.The Wholesale Price Index or WPI is "the price of a representative basket of wholesale goods". Some countries use the changes in this index to measure inflation in their economies, in particular India The Indian WPI figure was released weekly on every Thursday . But since 2009 it has been made monthly. It also influences stock and fixed price markets. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construc An index that measures and tracks the changes in price of goods in the stages before the retail level. Wholesale price indexes (WPIs) report monthly to show the average price changes of goods sold in bulk, and they are a group of the indicators that follow growth in the economy.

Although some countries still use the WPIs as a measure of inflation, many countries, including the United States, use the producer price index (PPI) instead.tion. This helps in analyzing both macroeconomic and microeconomic conditions.The wholesale price indexes used in Indonesia were originally set up in 1996; the base year was reset in April of 2006 with a WPI value of 2000. Index values in Indonesia are commonly expressed as 2000=100. As an example, the Indonesian Agriculture WPI in February of 2008 was 5140, but was expressed in the recent tables released by Statistics Indonesia as 257 (calculated as 5140/[2000/100]=257).

CalculationThe wholesale price index (WPI) is based on the wholesale price of a few relevant commodities of over 240 commodities available. The commodities chosen for the calculation are based on their importance in the region and the point of time the WPI is employed. For example in India about 435 items were used for calculating the WPI in base year 1993-94 while the advanced base year 2004-05 and which has now been changed to 2010-2011; uses 676 items. The indicator tracks the price movement of each commodity individually. Based on this individual movement, the WPI is determined through the averaging principle. The following methods are used to compute the WPI:Ten-Day Price IndexUnder this method, sample pricess with high intra-month fluctuations are selected and surveyed every ten days through phone. Utilizing the data retrieved by this procedure and with the assumption that other non-surveyed sample prices remain unchanged, a ten-day price index is compiled and released.This index is the most widely used inflation indicator in India. This is published by the Office of Economic Adviser, Ministry of Commerce and Industry. WPI captures price movements in a most comprehensive way. It is widely used by Government, banks, industry and business circles. Important monetary and fiscal policy changes are linked to WPI movements. It is in use since 1939 and is being published since 1947 regularly. We are well aware that with the changing times, the economies too undergo structural changes. Thus, there is a need for revisiting such indices from time to time and new set of articles / commodities are required to be included based on current economic scenarios. Thus, since 1939, the base year of WPI has been revised on number of occasions. The current series of Wholesale Price Index has 2004-05 as the base year. Latest revision of WPI has been done by shifting base year from 1993-94 to 2004-05 on the recommendations of the Working Group set upwith Prof Abhijit Sen,, Member, Planning Commission as Chairman for revision of WPI series. This new series with base year 2004-05 has been launched on 14th September, 2010. A brief on the historical development of this WPI is given below : -Base YearYear of IntroductionNo of Items in IndexNo of Price Quotations

Week ended 19th August 193919422323

End August 1939194778215

1952-53 (1948-49 as weight base)1952112555

1961-62July 1969139774

1970-71January 19773501295

1981-82July 19894472371

1993-94April 20004351918

2004-05September 20106765482

Earlier, the concept of wholesale price covered the general idea of capturing all transactions carried out in the domestic market. The weights of the WPI did not correspond to contribution of the goods concerned either to value - added or final use. In order to give this idea a more precise definition, it was decided to define the universe of the wholesale price index as comprising as far as possible all transactions at first point of bulk sale in the domestic market.Thus the latest WPI has a basket of 676 items with 5482 quotations. The major criticism for this index is that 'the general public does not buy at the wholesale level', thus WPI does not give the actual feeling of the amount of pressure borne by the general public. However, the increase in wholesale prices does affect the retail prices and as such give some feel of the consumer prices.

What is the difference between WPI and CPI inflation?Inflation is a general and sustained increase in overall price level of goods and services. The inflation rate is a key parameter basis which central government proposes its monetary and fiscal policy from time to time. The monetary policy primarily focuses on price stability and hence its concern for inflation is rather obvious.

Indicators of Measure of Inflation Whole-sale price index (WPI) and Consumer price index (CPI): are the two primary measures of inflation. Before, proceeding to know the difference between the two index measures for inflation, let us understand what an index signifies?An index figure reflects the change in a set of associated variables over a time period and in a particular direction. Thus, price index is reflective of the total change in price level paid by a producer or consumer. In the Indian context, 5 national indices are accounted for inflation measure that include WPI and other four CPI indices.WPI index reflects average price changes of goods that are bought and sold in the wholesale market. WPI in India is published by the Office of Economic Adviser, Ministry of Commerce and Industry. Further, the data for WPI is monitored and updated on a weekly basis taking into account all the 676 items that form the index. The various commodities taken into consideration for computing the WPI can be categorized into primary article, fuel and power, and manufactured goods.Primary articles included for the computation of WPI include food articles, non-food articles and minerals. In the fuel, power, light and lubricants, electricity, coal mining and mineral oil are included. The manufactured goods category encompasses food products; beverages, tobacco,and tobacco products; wood and wood products, textiles; paper and paper products; basic metals and alloys; rubber and rubber products and many others.An, important point to take note of is the whole sale price index (WPI) does not includes the cost of services.Further, as WPI accounts for changes in general price level of goods at wholesale level, it fails to communicate actual burden borne by the end consumer.WPI is the primary measure that is used by the Indian central government for ascertaining inflation as WPI in contrast to CPI accounts for changes in price at an early distribution stage.In contrast, CPI is computed by executing a weighted average on a particular set of goods and services. The computation of CPI takes into account price changes and the actual inflation that affects the end consumer. CPI is thus a reflection of changes in the retail prices of specified goods and services over a time period which are traded by particular consumer group

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