A recent data report unveiled the wholesale price inflation statistics for October 2020. The measurement of this inflation is conducted through the Wholesale Price Index (WPI). Notably, the wholesale price inflation saw a significant rise to its topmost level in eight months, marking a 1.48% hike in October 2020. This is comparable to 0% in October 2019 and 1.32% in September 2020. The surge was primarily fueled by manufactured items according to data disseminated by the commerce and industry ministry.
Manufactured Goods Inflation
The inflation related to the manufactured product group soared to a 19-month apex of 2.1%. In tandem, the core inflation (which excludes volatile goods from the commodities basket tracking Headline Inflation) experienced an acceleration to its highest level in 18 months, settling at 1.7%. Volatile commodities primarily constitute food and beverages (including vegetables) and fuel and light (crude oil). The formula for calculating Core inflation is: Core inflation = Headline inflation – (Food and Fuel) inflation.
Implication of Rising Core Inflation
The uptick in core inflation points to an amelioration in demand conditions, particularly following the lifting of the Covid-19 related lockdown. However, a large portion of this hike can be attributed to festival-related demands, indicating that it might be premature to label this as a comprehensive recovery just yet.
Inflation Explained
Simply put, inflation signifies the increase in prices of commonly used goods and services including food, clothing, housing, transport, recreation, and consumer staples. It measures the average change in the price of a basket of commodities and services over time, and indicates a reduction in the purchasing power of a unit of a country’s currency. While high inflation can lead to economic growth deceleration, a moderate level of inflation is crucial to promoting production.
Assessing Inflation in India
In India, the primary tools for measuring inflation are the Wholesale Price Index (WPI) and the Consumer Price Index (CPI), which track the changes in wholesale and retail-level prices respectively.
The Wholesale Price Index (WPI)
The WPI measures the price changes of goods sold in bulk by wholesale businesses to other businesses. It is published by the Office of Economic Adviser under the Ministry of Commerce and Industry, and is the most commonly used inflation indicator in India. However, one significant criticism of this index is that it doesn’t directly impact the general public as they do not purchase products at wholesale prices. The base year for the All-India WPI was updated from 2004-05 to 2011-12 in 2017.
