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How is WPI inflation rate calculated in India?

Categories: Economy and Policy, Quantitative Finance

With inflation rate surging to new heights, the term is more in the news than ever in India. While leaving
aside the debate on whether India should adopt CPI (Consumer Price Index) based inflation calculation
rather than the current WPI (Wholesale Price Index) based one, let’s find in detail how inflation rate is
calculated in India; which is the WPI based inflation rate.

What is inflation?
Inflation rate of a country is the rate at which prices of goods and services increase in its economy. It is an
indication of the rise in the general level of prices over time. Since it’s practically impossible to find out the
average change in prices of all the goods and services traded in an economy (which would give
comprehensive inflation rate) due to the sheer number of goods and services present, a sample set or a
basket of goods and services is used to get an indicative figure of the change in prices, which we call the
inflation rate.

Mathematically, inflation or inflation rate is calculated as the percentage rate of change of a certain price
index. The price indices widely used for this are Consumer Price Index (adopted by countries such as
USA, UK, Japan and China) and Wholesale Price Index (adopted by countries such as India). Thus
inflation rate, generally, is derived from CPI or WPI. Both methods have advantages and disadvantages.
Since India uses WPI method for inflation calculation, let’s go in to the details of WPI based inflation
calculation.

How is WPI (Wholesale Price Index) calculated?

In this method, a set of 435 commodities and their price changes are used for the calculation. The
selected commodities are supposed to represent various strata of the economy and are supposed to give
a comprehensive WPI value for the economy.

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the
calculation, let’s assume the base year to be 1970. The data of wholesale prices of all the 435
commodities in the base year and the time for which WPI is to be calculated is gathered.

Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a
kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

The WPI of wheat for the year 1980 is,

(Price of Wheat in 1980 – Price of Wheat in 1970)/ Price of Wheat in 1970 x 100

i.e. (6.10 – 5.75)/5.75 x 100 = 6.09

Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09.

In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted
average of individual WPI figures are found out to arrive at the overall Wholesale Price Index.
Commodities are given weight-age depending upon its influence in the economy.

How is inflation rate calculated?

If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the
year will be,

(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100

For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the
year 1981 is,

(109.72 – 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is 3.42%.

Since WPI figures are available every week, inflation for a particular week (which usually means inflation
for a period of one year ended on the given week) is calculated based on the above method using WPI of
the given week and WPI of the week one year before. This is how we get weekly inflation rates in India.

Characteristics of WPI
Following are the few characteristics of Wholesale Price Index

 WPI uses a sample set of 435 commodities for inflation calculation

 The price from wholesale market is taken for the calculation
 WPI is available for every week
 It has a time lag of two weeks, which means WPI of the week two weeks back will be available now

There are certain arguments in the open saying that the government shall adopt Consumer Price Index
(CPI) method for inflation calculation, which gives a more correct picture. More of that in another post...

Related Articles
- Commodities and their weight-ages in WPI calculation of India
- Inflation rates of India (2009)
- Inflation rates of India (2008)
- Base year and number of commodities used for inflation calculation in India
- The magic of Inflation

http://the-finance-blog.blogspot.in/2008/06/commodities-and-their-weight-ages-in.html

aturday, June 21, 2008

Commodities and their weightages in WPI calculation of India,

Part I
Categories: Economy and Policy

As on today, India uses a basket of 435 commodities and a base year of 1993-94 for its Wholesale Price
Index (WPI) based inflation rate calculation. The 435 commodities used for finding WPI range from food
items like rice, wheat to petroleum products to medicines and are given weightages depending upon their
importance and impact on the economy. Discussions are going on to revise the number of commodities
to 980 and base year to 2004-05.

The 435 commodities are divided to various groups and subgroups. Individual commodities, and as a
result, groups and subgroups have weightages. On a broader level, the 435 commodities are grouped
into,
1. Primary Articles
2. Fuel, Power, Light & Lubricants
3. Manufactured Products

Primary Articles consist of food grains, fruits and vegetables, milk, eggs, meats and fishes, condiments
and spices, fibers, oil seeds and minerals. Fuel, Power, Light & Lubricants consist of coal and petroleum
related products, lubricants, electricity etc. Manufactured Products consist of dairy products, atta, biscuits,
edible oils, liquors, cloth, toothpaste, batteries, automobiles etc. The group weightages
are 22.02525%, 14.22624% and 63.74851% for Primary Articles, Fuel, Power, Light & Lubricants and
Manufactured Products respectively. The total adds up to 100.

There are three more parts to this article. In the first part, we will cover Primary Articles, its sub
classifications, individual commodities and their weightages. Second part is for Fuel, Power, Light &
Lubricants, its sub classifications, individual commodities and their weightages and third part deals with
Manufactured Products, its sub classifications, individual commodities and their weightages.