Measures of inflation
Inflation is an important economic indicator used to measure the rising prices of goods and services. Simply put, it means that you can buy less today with the same amount of money as yesterday. That leads to a reduction of currency value over time. In India, the rate of inflation is determined mainly by the consumer price index (CPI) and wholesale price index (WPI).CPI measures the retail inflation of goods and services across 260 commodities and CPI-based inflation considers the change in prices at which consumers buy goods. WPI on the other hand reflects changes in the average prices of goods at the wholesale level. It is used in measuring the macroeconomic and microeconomic condition of an economy, however, its role in measuring inflation is limited because it does not consider the price of services and consumer prices. Hence, the RBI changed from using WPI as the main measure to monitor inflation to CPI.
Inflation for all?
In India, CPI inflation affects various sections of society differently. For example, agricultural workers have a different consumption basket as compared to the rich, and a price rise needs to be calculated for each consumption basket to assess the real impact of inflation across various sections of the population. Since food constitutes a major part of spending for low-income households, food inflation is likely to impact these households much more than the well-off sections of society. It is noteworthy that the wages of workers in the unorganized sector, who constitute most of the labor force in India, are not indexed to inflation.Food inflation at the heart of inflation in India
Core inflation is derived from overall inflation without the food and energy categories. It should be noted that food inflation is a major driver of overall inflation in India. Even though overall inflation was around five percent, prices of certain goods, especially food items caused distress in 2023. Food inflation was over 8 percent. Vegetables with a significant weight in the food index are one of the most volatile components and commonly experience price rises. Economists believe that inflation in India can be best tamed by addressing food inflation which lies at the core of the problem. Despite efforts to combat domestic food inflation through export prohibitions, supply chain disruptions are expected to continue in 2024 due to geo-political tensions, necessitating fiscal interventions.
