Measuring Inflation

What it is: CPI measures the average change over time in the prices paid by consumers for a basket of goods and services, such as food, housing, transportation, education, and medical care.

How it works: Prices are collected regularly from retail outlets and service providers. The items in the basket are weighted according to their importance in the average consumer’s budget.

Purpose: CPI reflects the cost of living and purchasing power for households. It is the most widely used indicator for tracking retail inflation and is closely monitored by policymakers, businesses, and the public.

Use in India: The Reserve Bank of India uses CPI as the primary measure for targeting inflation and making monetary policy decisions.

Key point: CPI directly affects consumers and is used for adjusting salaries, pensions, and welfare payments.

What it is: WPI measures the average change in the prices of goods sold in bulk at the wholesale level, before they reach consumers.

How it works: WPI tracks prices of a representative basket of goods traded between businesses, including raw materials, fuel, and manufactured products. It does not include services or retail margins.

Purpose: WPI is used to monitor price trends in the production and distribution sectors, serving as an early indicator of inflationary pressures in the supply chain.

Use in India: WPI was traditionally the main measure of inflation in India, but now CPI is more prominent for policy decisions.

Key point: WPI reflects price changes at the first stage of transactions and is important for businesses and policymakers to assess supply-side inflation.

What it is: PPI measures the average change over time in the selling prices received by domestic producers for their output.

How it works: PPI tracks prices at the production or wholesale level, including raw materials, intermediate goods, and finished products, but excludes retail margins and indirect taxes.

Purpose: PPI provides insight into inflationary trends in the production sector and is often a leading indicator for future changes in consumer prices.

Use globally: PPI is widely used in countries like the US and Europe. In India, WPI serves a similar role, but PPI is being considered for broader adoption.

Key point: PPI helps businesses and policymakers anticipate cost pressures that may eventually be passed on to consumers.