Friday, April 25, 2008

How is WPI inflation rate calculated in India?

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

    46 comments:

    Anonymous said...

    Is 7.4% a change over the past one week , or a change compared to the prices ,same week last year?

    Jithu said...

    > anon

    Its yearly inflation rate. Its the increase in prices since one year back from the given week.

    chawala said...

    good explanation but you have to also provide the weightage of each of these 435 commodities for proper understnading.

    thanks

    Jithu said...

    > chawala
    I shud have. but then that wud make the article really big, so..

    vv said...

    Dear Jithu,

    Good initiative to give information on inflation and other financial terms. Would like to visit your blog very often now.

    However, I am not able to see the date on which you have posted the article in the blog. For a reader who passes by and wants to read a past article, the date of writing puts the written matter in context.

    Pl. let me know if I am missing something.

    Jithu said...

    > vv
    I have disabled date few days back. You are right. I should put it back. Thanks for pointing it out.

    income.portfolio said...

    Jithu,

    Good educational post!.

    I think you should expand this to next level, by making some critical observation, your personal viewpoint about those observations, looking in context of the economy, looking in context of impact of regular citizens, comparing the WPI based inflation measurement with ground realities......

    I would like to see your views on (1) why we still use WPI, while most developing/emerging economies use CPI. (2) is the inflation constant across big cities, moderate cities, villages....

    I came across blog today, so it may seem to be dated response.... but liked your post, and wanted give thought proving feedback!!

    Best Regards,

    Asif said...

    Hey Jithu,

    Thanks man! i was hunting for this kind of article for years now & don't know why i could not find the one like this? It was very simple & understandable by any person who knows english. I think you are meeting upto your challenge of ''writing finance in layman's language'' Good work & keep it up!!!

    Your Fan now,
    Asif

    Nishant bali said...

    hey man u did gr8 job.. but i am having one query. bro i read u r article in that u have given wieghtage to each categories hwich is used while calculating the inflation. i.e. primary article 22% and manufacturing 63% and fuel, light 14%. but whenver oil prices increases then the inflation rises, though the portion of fuel, light is very low. can u explain why this so?

    nirali said...

    Hi,it was a damn good article n its so well written that these terms no more seem alien.pls clarify a doubt.
    i had an impression that WPI is calculated as( referring to your example) WPI=6.1*100/5.75=107.0715 while the method is different. can you explain fallacy in this method and establish the correctness of method you explained

    gunjita said...

    good and informative article...keep it up!

    Anonymous said...

    Hi,its really a commendable job u hv done in a way that, a layman could understand easily....Best Wishes

    Biju said...

    Hats off to you Gentleman, great effort

    tejas said...

    helo every one i thing is left in this area of information is ther is that how one can know which are those 435 commodities are to be only calculated so plz provide us that information.


    thNKS

    sonumedi said...

    you should give the latest example of inflation

    patil said...

    thanks for the information because i come to know that how inflation calculated in india. so it is use ful information for all students.

    Anonymous said...

    got to kno a lot....now can easily impress any1 wid ma knoldge...thanks

    namit said...

    good one but should have explained weighted mean

    Satish said...

    good work buddy....i have never seen such a financial article which is so easy to understand...keep up your work

    Sankar said...

    Very good briefing, Thanks a lot

    Anonymous said...

    this is the best educative blog i have ever seen..thank you very much Sir! I have some doubts regarding the inflation rate..Y dont we ever see a negative inflation rate??

    -Bandish Shah
    B.Tech
    IIT Delhi

    Bandish said...

    Also, I visited this official government site http://www.eaindustry.nic.in/Download_Data_0405.html to find the WPI.
    I downloaded the excel file and i found that the WPIs for the manufatured products category has not been mentioned for any year..could you please tell me why it is so??
    Thanking you,
    Bandish Shah

    Anonymous said...

    the wpi calculation posted by u will be understand by even a layman ..........good work.....

    abhishek sharma said...

    good job done thanks

    abu dhabi desert safari said...

    good article i like very much,thanks

    mintu kumar yadav said...

    very good and simple calculation by this method every one can calculate easily inflation rate
    thanks
    mintu yadav

    krikkrak said...

    Good post..thanks!

    sandy said...

    this article is very helpful for me..

    Food lover said...

    Hey Jithu, very comprehensible and lucid. Thanks!!

    Anonymous said...

    Good.very informative article.Thanks.Can you please tell me how is GDP in India calculated.

    Durga said...

    That was so easy to understand. :) Thanks for such an informative explanation on WPI.. So how is CPI calculated then?

    Equity Trading said...

    Thanks to author. Good post with great explanation.

    Anonymous said...

    Is the WPI normally calculated on the basis of Calendar Year (Jan to Dec) or Financial Year (April-March).Kindly enlighten.

    Munish said...

    Hey,
    Munish this side! Great explanation because it was so easy to grasp! thanks! :)
    Munish

    marine workcomp said...

    Thanks for this nice blog. I was waiting for this type of blog.


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    AnilS said...

    Can somebody please enlighten as to whether the Whole Sale price considered for calculating the WPI include local taxes ? or merely the economic cost (upto ED) and cost of production for agricultural produce ?

    Many thanx in advance !

    AnilS said...

    Can somebody please enlighten as to whether the Whole Sale price considered for calculating the WPI include local taxes ? or merely the economic cost (upto ED) and cost of production for agricultural produce ?

    Many thanx in advance !

    John said...

    Hi Sujith,

    This post was very informative. Very well explained. Kindly post about CPI too. Thanks.

    Anonymous said...

    I like the blog very much...well done keep going /Abu Dhabi Desert Safari

    PENNY STOCK INVESTMENTS said...

    Inflation is a problem worldwide.

    Pratik Vinod Gaokar said...

    Nice Blog !!!I have written the article on the similar topic on the blog..Might be interesting for the audience here

    http://teachingfinanceto10thgrader.blogspot.in/

    raju varma said...

    nice article...
    it was very help full for me but i have few more doubts.. it will be great if you help me out...
    1. is there any difference between calculation of inflation using wpi and cpi.(i am talking about procedure. i know wpi bucket and cpi bucket are different.)
    2.why are we using base year. i mean can't we just subtract present year prices of bucket from last year prices of bucket....
    thak you...

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    Vinod Kumar said...

    Great post!thanks for sharing this detailed content about inflation Inflation Calculator India

    webmaster said...

    Hi,

    WPI, Exchange Rates, PPP, Purchasing Power Parity, World Economics

    WPI, Exchange Rates, PPP, Purchasing Power Parity, World Economics :- The World Price Index (WPI) is a monthly index of PPP exchange rates against the US Dollar across the world’s 10 largest economies. Taking inspiration from and building on the concept of the Economist’s ‘Big Mac Index’, the WPI allows for a more timely method of making economic comparisons across countries. By drawing direct comparisons between average price levels of similar goods across countries, the World Price Index circumvents the difficulties and unreliability of using spot exchange rates or existing PPPs, which are already out of date by the time of release.