General Awareness

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K. J. Somaiya Institute of Management Studies and Research, Mumbai

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General Awareness Topic : Retail Inflation in India

Published : Wednesday, 24 September, 2014 11:26 AM  
 
MBA aspirants must be updated with General Awareness on current topics. General awareness topics with analytically drawn conclusions will benefit you in Essay writing / GD & PI. Today, you will read General Awareness Topic: 
 
Retail Inflation in India
 
Inflation rate in India is measured by wholesale price index which came down to 3.74 percent in August 2014 which is its lowest value in almost five years. Though the latest data brought some cheers to the newly elected government but not to the general public as public is more affected by consumer price inflation also known as retail inflation which is based on consumer price index (CPI). 
 
The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation releases Consumer Price Indices (CPI) with base year 2010 for rural, urban and combined every month with effect from January, 2011.
 
Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption. CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.
 
Average retail inflation in India in 2014 till the month of July 2014 was reported to be 6.93 percent. According to the Wholesale Price Index, inflation picked up in the month of August to 6.1 per cent from 5.8 per cent in July. 
 
On the other hand, the (newer) Consumer Price Index indicates that inflation slowed in the same month, moderating from 9.6 per cent to 9.5 per cent. To some extent, the divergence between WPI and CPI can be attributed to statistical differences stemming from coverage, classification of items and the relative weights of their constituents. 
 
However, there could be other reasons for this as well. For example, higher transaction costs, taxes, etc. are reflected in the CPI but not in the WPI. Apart from these reasons, food price inflation accounts for much of the gap between the two indices.
 
The CPI measures inflation as experienced by consumers in their day-to-day living expenses. Though the official inflation rate in India is measured on the basis of wholesale price index (WPI), but many analysts have argued that inflation rate must be measured by CPI as it is based on the price paid by ultimate consumer. For the same reason, it is believed that CPI is more suitable for capturing the market dynamics and forecasting realistic rate of inflation. Theoretically also, CPI is a better indicator of demand side pressures than the WPI.
 
Despite being a realistic measure of inflation, officials rely on WPI over CPI most importantly because we do not have a single CPI that is representative of the whole country and currently there are three CPIs representing different segments of the population. On the other hand, WPI is computed on an all-India basis, while CPIs are constructed for specific centers and then aggregated to an all-India index. Secondly, WPI is available with a shorter lag than the CPIs. 
 
Third, WPI has a broader coverage than the CPIs in terms of the number of commodities, quotations, inclusion of non -agricultural products and tradable items. Another reason is that retail prices take longer to reflect trends that are normally captured earlier in WPI.
 
The upshot of the entire argument is that both retail and wholesale inflation have their own pros and cons. Though retail inflation reflects the impact on public better than wholesale inflation, price trends are reflected by WPI earlier than CPI. Therefore, by relying on WPI, government can check prices even before they reach the retail market and thus affect the ultimate consumer.
  
 
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