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The government today came out with a new index on inflation, which revealed that the rate of price rise declined by 1.3 percentage points to a 7-month low of 8.5 per cent in August.  However, data on the old inflation series, which was released along with the new series today, showed that the rate of price rise dipped marginally from 10 per cent in July to 9.5 per cent in August.

As per the new index, which seeks to capture the price situation in a better way, inflation declined on account of falling prices of food items like vegetables, cereals and pulses. The new inflation series with 2004-05 as the base year has 241 more items than the old series with 1993-94 as the base year, which only reflected the price rise in 435 articles.

Consumer items widely used by the middle class, like ice -cream, mineral water, microwave ovens, washing machines, gold and silver are reflected in the new WPI inflation series.  Under the new series, prices of primary articles — food, non-food articles and minerals — shot up by 15.76 per cent on an annual basis in August.

What is inflation? Why do prices rise?

Inflation is a rise in the prices of goods and services in an economy over a period of time. When the price rises, each unit of currency buys fewer goods and services. The purchasing power of money falls when inflation is high. An inflationary situation is when there is ‘too much money chasing too few goods’.

What are the negative and positive aspects of inflation?

Inflation leads to a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings. The positive effects include easing an economic recession and reducing the level of debt.

How is inflation calculated in India?

India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. WPI is the index used to measure the change in the average price level of goods traded in wholesale market.

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

What is the new WPI index all about?

The government has changed the method of calculating inflation rate to effectively tap the variation in prices in tune with the changing times.

A number of new products have been included in the new Wholesale Price Index (WPI) which would be released every month. About 200 redundant items have been dropped from the index.

The government would release the overall wholesale inflation figure every month, while part of the data for primary articles, which contains food inflation, and the fuel category would be released weekly.

Some of the items like type-writers, video cassette recorders (VCRs) etc would not find place in the new series.

What are the new items included in the WPI index?

More consumer items used by the middle class has been included in the new index. Some of the important items included in the new series basket are flowers, lemon and crude petroleum in primary articles and ice cream, canned meat, palm oil, readymade/instant food powder, mineral water, computer stationary, leather products, scooters/ motorcycle tyre, polymers, petrochemical intermediates, granites, marbles, gold and silver, construction machinery, refrigerators, computers, dish antenna, transformer, microwave oven, communication equipment (telephone instruments), TV sets, VCD, washing machine and auto parts in manufactured products.

The new WPI series has 241 more items than the old index. With the additional items, the WPI now measures a total of 676 items against 435 earlier, while the number of quotations or sources for collating the price data would be 5,482 from 1,918 previously.

What will be the new weightage?

The new series would also have a different weight, in line with the changes in the economy. The weight of the primary articles category in the WPI would now be 20.11 per cent compared to 22.02 per cent earlier, fuel and power would be 14.91 per cent from 14.22 per cent, while that of manufactured products would be 64.97 per cent against 63.74 per cent.

What is Consumer Price Index?

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers.

It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under  CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

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