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Wholesale Price index-A Measure of Inflation

Wholesale Price index-A Measure of Inflation

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  • The cost of projects, price of supply of goods based on future contracts are often subject to change with these indices. As these indices change, cost and supply prices are changed accordingly. For example, an increase in the WPI may lead to increase in contract price of goods. This role of indices will increase substantially in the future as economy matures and as new markets develop for contractual trading. Also, often the wages and salaries are indexed to inflation.Problems with WPIHowever, although the WPI is used in India for various purposes, there are flaws in it. For many commodities like cars, wholesale markets may not exist. Also with increased competition, prices based on costs, and the reduced role of government in trading of goods and services, it is difficult to obtain prices and price data from private producers. The WPI doesn’t take the price of services into consideration, which now accounts for 60 percent of the GDP. Also, it is too general and cannot be used for specific purposes. For example, if an individual wants to know the trends in office stationery products, then WPI may not capture the correct or complete picture. Some commodities may have higher weights during a particular period and may not be consumed during other. For example, woolen textiles are part of the consumption basket only for four months in a city like Delhi. So a constant revision of weights is required in this regard. Another problem is that the share of expenditure of commodities may change overtime. For instance, the expenditure on computers, which were seldomly available before 1990s but now have a significant share in the expenditure of an urban Indian. So the weights of these indices need to be changed over time.WPI and CPI in IndiaInflation in India, measured by WPI, reached 12.9% on August 2, 2008 but fell sharply to 0.3% in March 2009 and negative in June 2009. The reason for such high volatility was the primarily fluctuation in international commodity prices. However, unlike WPI-based inflation, CPI-based inflation remained high. It did increase with the WPI but did not come down proportionately when wholesale prices fell. This indicates that intermediaries between consumers and wholesalers or retailers or both have not passed on the low-cost benefits to the customers and so have enjoyed increasing margins.The graph clearly shows that for most of the time, the rate of growth of the CPI is more than the rate of growth of the WPI, except when there are steep rises in the WPI during 2006 and 2008. This may be due to the inability of retailers or intermediaries to pass on the increasing cost to the consumers so quickly. This may also point out towards the existence of competition in the markets.Businesses Strategies and Price IndicesThese indices help businesses and can prove to be an effective analytical tool for them. These trends affect the economic policies and monetary policies of the government and RBI respectively. High inflation rates are often followed by tight monetary policies. In India, the WPI is related to interest rates as inflation is measured on the basis of the WPI. High inflation rates may point towards increasing interest rates. However, other factors also come into play while determining interest rates but inflation is a major one.These indices play a role in affecting sentiments. Low inflation rates may lead to a sentiment where investments financed through loans are deferred because of the expectation of lower interest rates in the future. Certain expectations are formed based on the effects on overall economy due to movements in these indices. For example, high inflation rates create a gloomy sentiment about the economy and people generally tend to defer investments in that case. Also, consumers tend to defer their heavy expenditures during inflation due to expectancy of fall in prices. For instance, housing expenditure. However, other day-to-day expenditures like grocery, energy, etc are generally not affected due to changes in these indices.It should be noted that falling inflation never means that prices are falling. Only negative inflation or a fall in these indices imply that prices are falling. Falling inflation (positive) or decreasing rate of increase in these indices only imply that prices are rising at a slower pace. So falling inflation for consumer does not mean that he/she has to pay a lower price in the future.These indices also give insights whether holding an asset is justifiable or not. For example, if an asset price rise is less than the inflation in the economy, then this may point out towards erosion of purchasing power of the asset holder. In other words this means that an asset holder may not be able to purchase the same quantity of goods in the next period if price rise in asset is proportionately less than the rise in these indices by selling that asset. So investment in assets must be made keeping this in mind. An absolute increase in the price of the asset does not definitely mean that the asset holder has gained in real terms.Also movements or changes in these indices affect the futures market. High inflation rate and increasing trend may point towards higher price in future and hence higher prices of futures contracts. Large movements or fluctuations in these indices often open up the opportunity for arbitrage, which is making profit due to price differences in two markets (here different markets refer to future and spot market).If trends are analyzed (in graph also) then it would be clear that large margins or the gap between the rate of increase of WPI and CPI could not be maintained for a long period of time because of the existence of competition in most of the markets. Trends indicate that a fall in WPI inflation is often followed by a fall in CPI inflation. So if the current situation is assessed, then it can be the case that retailers or intermediaries would see a squeeze in their margins as the inflation gap between the WPI and the CPI will eventually get reduced. Also, CPI inflation has already started coming down. At the same time an increasing gap between the WPI and the CPI inflation may attract interference by the government in some form of regulations or required policy changes to check such trends.So these indices at times may be inconsistent, may not guarantee fulfillment of requirements of an individual and analysis based on these might not be complete or correct. However, these indices provide useful tools for analysis and some conclusions could be drawn based on these.
  • The cost of projects, price of supply of goods based on future contracts are often subject to change with these indices. As these indices change, cost and supply prices are changed accordingly. For example, an increase in the WPI may lead to increase in contract price of goods. This role of indices will increase substantially in the future as economy matures and as new markets develop for contractual trading. Also, often the wages and salaries are indexed to inflation.Problems with WPIHowever, although the WPI is used in India for various purposes, there are flaws in it. For many commodities like cars, wholesale markets may not exist. Also with increased competition, prices based on costs, and the reduced role of government in trading of goods and services, it is difficult to obtain prices and price data from private producers. The WPI doesn’t take the price of services into consideration, which now accounts for 60 percent of the GDP. Also, it is too general and cannot be used for specific purposes. For example, if an individual wants to know the trends in office stationery products, then WPI may not capture the correct or complete picture. Some commodities may have higher weights during a particular period and may not be consumed during other. For example, woolen textiles are part of the consumption basket only for four months in a city like Delhi. So a constant revision of weights is required in this regard. Another problem is that the share of expenditure of commodities may change overtime. For instance, the expenditure on computers, which were seldomly available before 1990s but now have a significant share in the expenditure of an urban Indian. So the weights of these indices need to be changed over time.WPI and CPI in IndiaInflation in India, measured by WPI, reached 12.9% on August 2, 2008 but fell sharply to 0.3% in March 2009 and negative in June 2009. The reason for such high volatility was the primarily fluctuation in international commodity prices. However, unlike WPI-based inflation, CPI-based inflation remained high. It did increase with the WPI but did not come down proportionately when wholesale prices fell. This indicates that intermediaries between consumers and wholesalers or retailers or both have not passed on the low-cost benefits to the customers and so have enjoyed increasing margins.The graph clearly shows that for most of the time, the rate of growth of the CPI is more than the rate of growth of the WPI, except when there are steep rises in the WPI during 2006 and 2008. This may be due to the inability of retailers or intermediaries to pass on the increasing cost to the consumers so quickly. This may also point out towards the existence of competition in the markets.Businesses Strategies and Price IndicesThese indices help businesses and can prove to be an effective analytical tool for them. These trends affect the economic policies and monetary policies of the government and RBI respectively. High inflation rates are often followed by tight monetary policies. In India, the WPI is related to interest rates as inflation is measured on the basis of the WPI. High inflation rates may point towards increasing interest rates. However, other factors also come into play while determining interest rates but inflation is a major one.These indices play a role in affecting sentiments. Low inflation rates may lead to a sentiment where investments financed through loans are deferred because of the expectation of lower interest rates in the future. Certain expectations are formed based on the effects on overall economy due to movements in these indices. For example, high inflation rates create a gloomy sentiment about the economy and people generally tend to defer investments in that case. Also, consumers tend to defer their heavy expenditures during inflation due to expectancy of fall in prices. For instance, housing expenditure. However, other day-to-day expenditures like grocery, energy, etc are generally not affected due to changes in these indices.It should be noted that falling inflation never means that prices are falling. Only negative inflation or a fall in these indices imply that prices are falling. Falling inflation (positive) or decreasing rate of increase in these indices only imply that prices are rising at a slower pace. So falling inflation for consumer does not mean that he/she has to pay a lower price in the future.These indices also give insights whether holding an asset is justifiable or not. For example, if an asset price rise is less than the inflation in the economy, then this may point out towards erosion of purchasing power of the asset holder. In other words this means that an asset holder may not be able to purchase the same quantity of goods in the next period if price rise in asset is proportionately less than the rise in these indices by selling that asset. So investment in assets must be made keeping this in mind. An absolute increase in the price of the asset does not definitely mean that the asset holder has gained in real terms.Also movements or changes in these indices affect the futures market. High inflation rate and increasing trend may point towards higher price in future and hence higher prices of futures contracts. Large movements or fluctuations in these indices often open up the opportunity for arbitrage, which is making profit due to price differences in two markets (here different markets refer to future and spot market).If trends are analyzed (in graph also) then it would be clear that large margins or the gap between the rate of increase of WPI and CPI could not be maintained for a long period of time because of the existence of competition in most of the markets. Trends indicate that a fall in WPI inflation is often followed by a fall in CPI inflation. So if the current situation is assessed, then it can be the case that retailers or intermediaries would see a squeeze in their margins as the inflation gap between the WPI and the CPI will eventually get reduced. Also, CPI inflation has already started coming down. At the same time an increasing gap between the WPI and the CPI inflation may attract interference by the government in some form of regulations or required policy changes to check such trends.So these indices at times may be inconsistent, may not guarantee fulfillment of requirements of an individual and analysis based on these might not be complete or correct. However, these indices provide useful tools for analysis and some conclusions could be drawn based on these.
  • WPI and CPI in IndiaInflation in India, measured by WPI, reached 12.9% on August 2, 2008 but fell sharply to 0.3% in March 2009 and negative in June 2009. The reason for such high volatility was the primarily fluctuation in international commodity prices. However, unlike WPI-based inflation, CPI-based inflation remained high. It did increase with the WPI but did not come down proportionately when wholesale prices fell. This indicates that intermediaries between consumers and wholesalers or retailers or both have not passed on the low-cost benefits to the customers and so have enjoyed increasing margins.The graph clearly shows that for most of the time, the rate of growth of the CPI is more than the rate of growth of the WPI, except when there are steep rises in the WPI during 2006 and 2008. This may be due to the inability of retailers or intermediaries to pass on the increasing cost to the consumers so quickly. This may also point out towards the existence of competition in the markets.Businesses Strategies and Price IndicesThese indices help businesses and can prove to be an effective analytical tool for them. These trends affect the economic policies and monetary policies of the government and RBI respectively. High inflation rates are often followed by tight monetary policies. In India, the WPI is related to interest rates as inflation is measured on the basis of the WPI. High inflation rates may point towards increasing interest rates. However, other factors also come into play while determining interest rates but inflation is a major one.These indices play a role in affecting sentiments. Low inflation rates may lead to a sentiment where investments financed through loans are deferred because of the expectation of lower interest rates in the future. Certain expectations are formed based on the effects on overall economy due to movements in these indices. For example, high inflation rates create a gloomy sentiment about the economy and people generally tend to defer investments in that case. Also, consumers tend to defer their heavy expenditures during inflation due to expectancy of fall in prices. For instance, housing expenditure. However, other day-to-day expenditures like grocery, energy, etc are generally not affected due to changes in these indices.It should be noted that falling inflation never means that prices are falling. Only negative inflation or a fall in these indices imply that prices are falling. Falling inflation (positive) or decreasing rate of increase in these indices only imply that prices are rising at a slower pace. So falling inflation for consumer does not mean that he/she has to pay a lower price in the future.These indices also give insights whether holding an asset is justifiable or not. For example, if an asset price rise is less than the inflation in the economy, then this may point out towards erosion of purchasing power of the asset holder. In other words this means that an asset holder may not be able to purchase the same quantity of goods in the next period if price rise in asset is proportionately less than the rise in these indices by selling that asset. So investment in assets must be made keeping this in mind. An absolute increase in the price of the asset does not definitely mean that the asset holder has gained in real terms.Also movements or changes in these indices affect the futures market. High inflation rate and increasing trend may point towards higher price in future and hence higher prices of futures contracts. Large movements or fluctuations in these indices often open up the opportunity for arbitrage, which is making profit due to price differences in two markets (here different markets refer to future and spot market).If trends are analyzed (in graph also) then it would be clear that large margins or the gap between the rate of increase of WPI and CPI could not be maintained for a long period of time because of the existence of competition in most of the markets. Trends indicate that a fall in WPI inflation is often followed by a fall in CPI inflation. So if the current situation is assessed, then it can be the case that retailers or intermediaries would see a squeeze in their margins as the inflation gap between the WPI and the CPI will eventually get reduced. Also, CPI inflation has already started coming down. At the same time an increasing gap between the WPI and the CPI inflation may attract interference by the government in some form of regulations or required policy changes to check such trends.So these indices at times may be inconsistent, may not guarantee fulfillment of requirements of an individual and analysis based on these might not be complete or correct. However, these indices provide useful tools for analysis and some conclusions could be drawn based on these.

Transcript

  • 1. A benchmark for inflation
    Presented By:-
    Parampalsingh 500901037
    ShawetaWadhawan 500801518
    ShrayJali 500901062
    VivekRaina 500901068
  • 2. Wholesale price index
    • The price of a representative basket of wholesale goods
    • 3. Central measure of inflation
    • 4. Focuses on the price of goods traded between corporations
    • 5. Released weekly on every Thursday and influences stock and fixed price markets
    • 6. Price movement of each commodity individually determines the WPI through the averaging principle.
  • Wholesale price index
    • The wholesale price index comprises of the following indices:
    • 7. Domestic Wholesale Price Index (DWPI)
    • 8. Export Price Index (EPI)
    • 9. Import Price Index (IPI)
    • 10. Overall Wholesale Price Index (OWPI)
  • Origin & history
    • The Office of the Economic Adviser to the Government of India published for the first time WPI with base week ended August 19, 1939, from the week commencing January 10, 1942
    • 11. Index was calculated as the GM of the price relatives of 23 commodities
    • 12. These commodities were classified into four groups
    • 13. Food & Tobacco
    • 14. Agricultural commodities
    • 15. Raw materials
    • 16. Manufactured articles
    • 17. Each item was assigned equal weight
    • 18. There was a single price quotation for each item
  • Situation upto FY 2009-2010
    • 1st April, 2000
    • 19. Weights are assigned on the basis of the entire wholesale transactions
    • 20. The base year was 1993-94
    • 21. Three broad sectors namely,
    • 22. Primary Articles
    • 23. Fuel, Power, Light and Lubricants
    • 24. Manufactured Products
  • Comparative study
    Source: http://eaindustry.nic.in/pib.htm
  • 25. Setting up of wpi
    • Finalization of the base year
    • 26. Finalization of the item basket
    • 27. Finalizing Classification structure
    • 28. Allocation of weights at major groups/ sub groups
    • 29. Finalization of item specification and sources of collection
    • 30. Collection of price
    • 31. Calculation of index
  • Fixing the base year
    • Base Price index= 100
    • 32. Changes not before 5 years and not after 10 years
    • 33. Previous base years were 1970-71, 1981-82, 1993-94
    • 34. Criterion
    • 35. Normal year with no abnormalities in trade and production, without any political disturbances, wars, natural calamities
    • 36. Data should be available for that year
    • 37. Year should be as recent as possible
    • 38. Comparable with other data series in national and state level
  • Classification
  • 39. Weights assignment
    • Allocation of weights is done based on the traded value of the item
    • 40. But for agricultural commodities it is difficult to obtain the traded value so marketed value(MV) is used
    • 41. MV= Marketed Surplus Ratio(MSR) X Value of Production (VoP)
    • 42. VoP depends on quantity of production and an average price of commodity
    • 43. MSR is ratio of marketed quantity and quantity of production
  • Calculation of wpi
    • Laspeyres Formula (relative method): It is given by the formula as :
    • 44. Ten-Day Price Index:
    • 45. Calculation Method:
  • Linking Factor
    • Methods for linking a new series with an old one
    i) Arithmetic conversion method
    ii) Ratio method
    iii) Regression method
    • The office of the Economic Adviser uses the arithmetic conversion method
    • 46. The linking factor for the all commodities index is 2.478 for conversion of indices from the base 1993-94 series to the earlier base 1981-82.
  • Trend over the years
  • 47. Current Situation of
    Wholesale Price Index
  • 48. Snapshot
  • 49. Snapshot
  • 50. Snapshot
  • 51. Snapshot
  • 52. Snapshot
  • 53. Snapshot
  • 54.
  • 55.
  • 56. Snapshot
  • 57. How to calculate inflation
    • The formula for calculating the Inflation Rate
    (B - A) * 100
    A
  • 58. Snapshot
  • 59. Problems with WPI
    • Wholesale markets for products like cars may not exist
    • 60. WPI doesn’t take the price of services into consideration
    • 61. Some commodities may have higher weights during a particular period and may not be consumed during other