WPI, CPI, IIP and Inflation

 

Basic Terminology

Inflation- Rise in the price of goods and services(decrease in the purchasing power of currency) 

Deflation- Fall in the price of goods and services(increase in the purchasing power of currency)

Disinflation- decrease in the inflation rate

Reflation- inflation post deflation

Stagflation- Condition of high unemployment + high inflation

Skewflation- Variations in inflation rate across sectors

Shrinkflation- Hidden inflation, reducing the size of product but selling at same price(part of Greedflation) 

Shadow inflation- Hidden inflation, no change in inflation index(CPI) because of no change in price, but quality of product/service will be reduced

Greedflation- Inflation fueled by corporate greed. It is based on profit-price spiral rather than wage-price spiral(price increase with increase in wages). Companies exploit the situation and inflationary pressure falls on consumers. This situation badly affects the economy of a country by eroding consumer trust. 

Biflation- Simultaneous occurance of Inflation & deflation(goods and services wise). Some Good's price is rising while others are falling. Biflation is associated with Cantillon effect(uneven change in relative prices of commodities resulting from a change in money supply). 

Imported Inflation- Inflation because of Imported goods. 

Core inflation vs headline inflation

Headline inflation- Inflation because of all major commodities

Core inflation- excluding those sectors whose inflation rate varies frequently

         Core inflation= Headline inflation- [fuel + food]inflation

Types of Inflation

Creeping Inflation- inflation rate is low(<3%) 

Walking Inflation- high inflation rate(3%-9%) 

Galloping Inflation- very high inflation rate(>9%) 

Hyperinflation- skyrocketing out of control inflation(>50%) 

 

Factors of Inflation

In a market based economy, the price of commodities is decided by demand and supply. Any sudden change in demand and supply results in inflation and deflation. 

Demand(Pull inflation)- factors that increase the demand for a commodity. In general prices and quantities move in same directions. 

Cost(Push inflation)- factors that decrease the supply/production of a commodity. In general prices and quantities move in opposite directions. 

Built in inflation- expectations/prediction based inflation. (Inflationary expectation and price-wage spiral play important role in built in inflation) 

High inflation of past forces workers to demand high wages to sustain their lifestyle resulting in built in inflation. 

Measures to Combat Inflation

1. Monetary Policy(by Central Bank of a country) 
2. Fiscal Policy(by Government) 

In India, the inflation target [CPI(C)= 4(+/-) 2] is decided by the government, and it is the job of the RBI to maintain inflation within the target range. 

Inflation Assessment

There are a number of indicators to measure inflation.

Consumer Price Index(CPI)- change in the retail price level of selected goods and services(retail price- price at which consumers buy commodities) 

Wholesale Price Index(WPI)- change in wholesale price levels of selected goods only(services sector not included) 

Producer Price Index(PPI)- average change in the price of goods and services received by the producers. It includes the goods and services sectors.

Index of Industrial Production(IIP)- measures the production level of the manufacturing sector and indirectly measures inflation. 

8 core industries with 40. 27% weight(Refinery > Electricity > Steel> Coal> Crude oil> Natural gas> Cement> Fertilizer) 

GDP deflator is also used as a measure of inflation.

CPI(Combined= Rural+Urban) is used by the government to target inflation. 

Reasons for different CPI and WPI

• The service sector is included in CPI but excluded from WPI.
• CPI → change in retail price,    WPI → change in wholesale price
• Different number of basket commodities (WPI- 697, CPI- 450 roughly) 
• Different weights are assigned to different commodities in the WPI and CPI. Like CPI, it assigns more weight to food items and consumer goods and services. 
• Difference in base year

Misery Index

Created by Arthur Okun. 

Misery Index = Unemployment rate + Inflation rate

Phillips Curve

Conceptualized by William Phillips. 

Inflation ∝ 1/unemployment

The relationship doesn't hold true in all situations. 

India Manufacturing Innovation Index(IMII)- Published by Department of Science and Technology (DST) + United Nations Industrial Development Organization (UNIDO) 

As part of National Manufacturing Innovation Survey(NMIS).