Inflation Data: August 2020

• 15 Sep 2020

Why in News

Recently, the inflation data for the month of August 2020 was released. The inflation data includes retail inflation and wholesale inflation data.

• The retail inflation is measured by the Consumer Price Index (CPI).
• The wholesale price-based inflation is measured by Wholesale Price Index (WPI).

Key Points

• Retail Inflation:
  
  • The retail inflation growth dipped to 6.69% in the month of August. It was at 6.73% in July 2020.
  • However, the retail inflation continued to grow beyond the Reserve Bank of India’s (RBI) upper margin of 6%.
    
    • The Central government has mandated the RBI to keep inflation within the range of 4±2%.
    • This inflation range (4% within a band of +/- 2%) was recommended by the committee headed by Urjit Patel in 2014.
  • The growth in retail inflation was primarily due to a rise in meat and fish prices that saw a 16.50% on-year rise in August.
  • The Consumer Food Price Index (CFPI) or the inflation in the food basket eased to 9.05% in the month of August. It was at 9.27% in July 2020.
• Wholesale Inflation:
  
  • The wholesale price-based inflation rose to 0.16% in August as food items and manufactured products turned costlier.
    
    • The WPI inflation was in the negative territory for four straight months — April (-) 1.57%, May (-) 3.37%, June (-) 1.81% and July (-) 0.58%.
  • Inflation in food articles during August stood at 3.84%. However, fuel and power inflation fell 9.68% in August.
• Implication: The difference between WPI (food) and CPI (food) shows the supply side issues due to several lockdowns at regional level.

Inflation

• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
• Inflation measures the average price change in a basket of commodities and services over time.
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
• However, a moderate level of inflation is required in the economy to ensure that production is promoted.
• In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively.

Consumer Price Index

• It measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO).
• The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
• The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear.
• Four types of CPI are as follows:
  
  • CPI for Industrial Workers (IW).
  • CPI for Agricultural Labourer (AL).
  • CPI for Rural Labourer (RL).
  • CPI (Rural/Urban/Combined).
  • Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.
• Base Year for CPI is 2012.
• The Monetary Policy Committee (MPC) uses CPI data to control inflation.

Wholesale Price Index

• It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
• Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
• It is the most widely used inflation indicator in India.
• Major criticism for this index is that the general public does not buy products at wholesale price.
• The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.

CPI vs. WPI

• WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the consumer level.
• WPI does not capture changes in the prices of services, which CPI does.
• In April 2014, the RBI had adopted the CPI as its key measure of inflation.

Source: IE