The inflation data for August 2020, including retail and wholesale inflation rates, have recently been reported. The growth rates, measured by the Consumer Price Index (CPI) and the Wholesale Price Index (WPI), provide insights into the state of the economy.
Retail Inflation
Measured by the CPI, retail inflation in August 2020 slightly dipped to 6.69% from 6.73% in July. However, it continued to exceed the Reserve Bank of India’s (RBI) upper limit of 6%. The RBI is directed by the Central Government to manage inflation within a 4±2% range, as recommended by the 2014 committee headed by Urjit Patel. The increase in retail inflation can be attributed mainly to a surge in the prices of meat and fish, which saw a 16.50% on-year rise in August.
In contrast, the Consumer Food Price Index (CFPI), or food basket inflation, eased to 9.05% in August from 9.27% in July.
Wholesale Inflation
The WPI, on the other hand, showed an upturn, with wholesale price-based inflation rising to 0.16% in August due to costly food items and manufactured goods. Contrastingly, the previous four months had witnessed negative WPI inflation rates: -1.57% in April, -3.37% in May, -1.81% in June, and -0.58% in July.
Inflation in food articles stood at 3.84% in August, while inflation in fuel and power declined by 9.68%.
Inflation
Inflation speaks to how the costs of goods and services frequently utilized by individuals, such as food, clothes, housing, and transport, change over time. It measures the average shift in the prices of a set of commodities and services. It reflects the depreciating purchasing power of a nation’s currency, which may potentially lead to an economic slowdown. Yet, a moderate level of inflation is necessary to stimulate production.
Consumer Price Index
The CPI assesses price fluctuations from the retail buyer’s standpoint. It calculates the difference in the cost of goods and services like food, health care, education, and electronics that Indian consumers purchase for personal use. The CPI has various sub-groups including food and beverages, fuel and light, housing, clothing, bedding, and footwear.
There are four types of CPI: for industrial workers, for agricultural laborers, for rural laborers, and combined, which include rural and urban areas. The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment, while the fourth is prepared by the National Statistical Office (NSO).
The base year for CPI computation is 2012. This data is used by the Monetary Policy Committee (MPC) to manage inflation.
Wholesale Price Index
The WPI measures changes in the prices of commodities sold in bulk from businesses to businesses. It is published by the Office of Economic Adviser, Ministry of Commerce and Industry, and is the most commonly used inflation indicator in India.
Critics argue that the WPI is not entirely reliable as consumers do not buy products at wholesale prices. The base year for the All-India WPI was updated from 2004-05 to 2011-12 in 2017.
CPI vs WPI
The WPI helps track producer-level inflation, while the CPI captures price changes at the consumer level. The significant difference is that the WPI does not consider the changes in the prices of services, which the CPI does. In April 2014, the RBI started using the CPI as its primary measure of inflation.
