Inflation is a tendency of increase in prices, either in the economy or in the industry over a period of time. The consumer price inflation or CPI comprises almost all of the products including food, fuel and services. So when we talk of inflation we generally refer to Consumer Price Inflation.
Inflation is a general and sustained increase in overall price level of goods and services. The inflation rate is a key parameter basis which central government proposes its monetary and fiscal policy from time to time. The monetary policy primarily focuses on price stability and hence its concern for inflation is rather obvious. Inflation is usually measured based on certain indices. Wholesale price index (WPI) and Consumer price index (CPI) are the two primary measures of inflation.
The price index is measured at fixed intervals and changes in it are an indicator of average price movement of a fixed basket of goods and services (that represent the entire economy). A price index is a measure of the proportionate, or percentage, changes in a set of prices over time. A price index is typically assigned a value of unity, or 100, in some reference period and the values of the index for other periods of time are intended to indicate the average proportionate, or percentage, changes in prices from this price reference period.
A consumer price index (CPI) measures changes in the prices of goods and services purchased or otherwise acquired by households, which households use directly, or indirectly, to satisfy their own needs and wants. Consumer price index (CPI) can be intended to measure either the rate of price inflation as perceived by households, or changes in their cost of living (that is, changes in the amounts that the households need to spend in order to maintain their standard of living). Such changes affect the real purchasing power of consumer’s incomes and their welfare. As the prices of different goods and services d not all change at the same rate, a price index can only reflect their average movement. CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country. People not included in the report are non-metro populations, farm families, armed forces, and people serving in prison and those in mental hospitals.
The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. The wholesale price index measures and tracks the changes in the price of goods in the stages before the retail level. The higher this number is the stronger the affect on consumer inflation.
The Consumer Price Index (CPI) is India’s main measure of inflation, instead of the earlier Wholesale price Index (WPI), since it is a better indicator of price change for goods and services used by the average household.