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.

Things like refrigerator, microwave oven, computers and ice-creams to be used to measure WPI!

You know what's common to Ovens, Jewelry, Ice-cream, Towels, Washing Machines, Footballs & VCD players?

Answer: They are some of the things the government will now use to calculate wholesale inflation.

Some key important things that you must know about the new wholesale price index:

The base year against which the price rise is measured has been advanced by a decade from 1993-94 to 2004-05.

The new WPI index would concentrate more on accuracy and indication about the actual price movement in real time.

The new series would comprise of different weight-age levels, relative to the changes in the economy over a period of time. For instance, the weight of manufactured products would surge from 63.74% as per 1993-94 base price levels to 64.97% now.

Interestingly, the new WPI index now also includes the more commonly used items such as refrigerator, washing machine, microwave oven, computer and Television sets – which have now turned into basic needs, from wants. In fact, even Consumer items widely used by middle class such ice-cream, mineral water, readymade and instant food products, canned meat, leather products, dish antenna and even precious metals like gold and silver finds its place in the new index.

India Adds to the Glitter!

Gold prices touched a record as high as Rs 19.145 per ten grams in the last few weeks as the demand for the yellow metal continued to be strong.

Even in an uncertain global economic situation gold seems to be the preferred destination of investors’ money. Besides the individual investors there are indications that even big pension funds and central banks, which are getting worried about the government bonds, are also actively buying gold.

According to the World Gold Council India has been the largest gold market in terms of Volume. Around 18,000 tons of gold sits in the hands of private Indian consumers.
The retreat of good monsoon and arrival of festivals the gold demand for gold is further expected to rise.

What is keeping the Indians glued to gold?
Basically, investors are looking to protect themselves against inflation, currency and market volatility. With the ongoing economic volatility gold offers retail investors simplicity, transparency and security in highly volatile markets.


Source: Outlook money (22nd Sept)

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