Inflation & It's elements

In economics, the word inflation refers to general rise in prices, measured against a standard level of purchasing power. Previously, the term was used to refer to an increase in the money supply, and now referred to as expansionary monetary policy pr monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality.

Wholesale Price Index (WPI)
Declared on a monthly basis, the index is calculated on the average rate of change in the wholesale market. The WPI contains 980 commodities, with a base year of 2004-05. The WPI basket comprise manufactured products (65%), primary articles (20%) and fuel & power (15%). Food articles are a part of primary articles, constituting 14% of the overall WPI. Processed foods, part of manufactured products, account for 11% of the WPI.

Commodity Price Index (CPI)
The CPI is declared on a monthly basis. It is a statistical time series value based on the weighted average rate of change in the prices of a set of goods and services purchased by the consumer. The CPI is more comprehensive, catching the inflation value from the end-consumer perspective rather than from a wholesale one.

In India,  inflation is measured by movement of the WPI, which is more closely followed than the CPI.

What are price deflators?

Recently the GDP fiasco was blamed on the use of improper deflators, here’s an explanation that would help you understand it better

What is a price deflator?
 A deflator is used to convert data compiled over a period into prices prevailing at an earlier point in time. For example, the current price of a television can be deflated to what it would cost say three years ago. Essentially a deflator removes the effect of inflation from data, making it comparable across periods.

How is it used in India?
In India a combination of Wholesale Price Index (WPI) and Consumer Price Index (CPI) is used as deflator. The usage is dependent on a particular estimate we are trying to deflate. There would be different deflators for private consumption and government consumption. There is a difference in quarterly and year-end deflators; this is due to the fact that prices are not constant. At the yearend we have an overall measure of WPI/CPI which is used appropriately. This is why year-end estimates of GDP are more reliable that quarterly estimates.

Source: ET