Friday, November 11, 2011

Inflation and its measurements...


Inflation rate of a country is the rate at which prices of goods and services increase in its economy. It is an indication of the rise in the general level of prices over time.

Since it’s practically impossible to find out the average change in prices of all the goods and services traded in an economy (which would give comprehensive inflation rate) due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate.

Calculation of Inflation

Let us say that we have WPI for the beginning and the end of year.

Inflation rate for the year will be = (WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100
For example,

Say, WPI on Jan 1st 2010 is 108.33

WPI on Jan 1st 2011 is 112.33

Therefore, inflation rate for the year 2011 = (112.33 – 108.33)/108.33 x 100 = 3.69% .

That is to say that the inflation rate for the year 2011 is 3.69%.

Since WPI figures are available every week, inflation for a particular week (which usually means inflation for a period of one year ended on the given week) is calculated based on the above method using WPI of the given week and WPI of the week one year before. This is how we get weekly inflation rates in India.
‎***Wholesale Price Index

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. The characteristics of Wholesale Price Index are as follows:-

1. A new WPI series with 2004-05 base was released on 14th Sep 2010 with 676 items in the commodity basket. Previously, WPI used a sample set of 435 commodities as an indicator of movement in prices of commodities in all trade and transactions.

2. The prices are taken from wholesale market.

3. It is also the price index which is available on a weekly basis.

4. It has the shortest possible time lag of only two weeks ie the data available in the current week is calculated on the basis of prices two weeks back.

****Calculation of WPI 

WPI is calculated on a base year. The WPI for the base year is pinned at 100.

Let’s assume the base year to be 2004. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered.

Let’s calculate WPI for the year 2010 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 2004 = Rs 6.00 and in 1980 = Rs 6.50

The WPI of wheat for the year 2010 is calculated as follows:-

First calculate,
((Price of Wheat in 2010 – Price of Wheat in 2004 )/ Price of Wheat in 2004) x 100

i.e. (6.50 – 6.00)/6.00 x 100 = 8.33

Since WPI for the base year is assumed as 100, WPI for 2010 will become 100 + 8.33 = 108.33.

In this way individual WPI values for the remaining 675 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. It is to be noted that Commodities are given weightage depending upon its influence in the economy. Like weightage of petrol is lesser than that of diesel.

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