Why India Adopted CPI to Measure Inflation?

By Advisorymandi
12-June-2018 9:44:26 AM
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Why India Adopted CPI to Measure Inflation

As you know, Wholesale Price Index (WPI) and Consumer Price Index (CPI) are the two techniques or economic indicators used to measure inflation. For a long time, India has been using WPI to measure the inflation but from awhile, India has adopted CPI to measure the inflation rate. If you wondering, why? Then don’t worry! There’s a reason for it. But, before we come to that point, let’s see what these indexes are and what role does each play in measuring inflation.

 

Wholesale Price Index (WPI) is an economic event used to calculate the price changes in the wholesale market. It measures the prices of a set of commodities charged by manufacturers and wholesalers before the retail level. But, WPI was insufficient and totally skips the prices of services while calculating the inflation.

 

On the other hand, the Consumer Price Index (CPI) is a widely used economic indicator and most frequently used statistics used to measure the rate of inflation and deflation. Unlike WPI, CPI measures the price changes in a basket of goods and services, such as transportation, food, and medical care. This is why it is also known as Cost of Living Index.

 

It focuses on the change in the cost of living at the consumer’s end.

So, why India adopted CPI instead of WPI, to measure inflation?

Well, there are many reasons for opting CPI over WPI. Point is, the RBI finally decided to calculate the inflation from consumers’ end instead of manufacturers’ end. Also, CPI is a better inflation indicator than WPI since it covers all its disadvantages.

  • The very first reason for replacing WPI from CPI is to include services too. Currently, services account for nearly 60 percent of GDP and a large no. of these services are not traded with other countries. WPI didn’t serve to the services such as healthcare, education, transportation, and tourism etc. whereas CPI does.
  • Consumer Price Index (CPI) used to calculate for rural and urban part of the country simultaneously so that specific measures can be taken for rural and urban benefits.
  • CPI gives the general idea of retail inflation and prices driven by the consumer demand and supply. It is a better indicator of inflation for guiding monetary policy decisions & interest rate decisions than WPI Inflation.

Consumer Price Index (CPI) is a crucial indicator which can be used by checking on economic calendar time-to-time. Therefore, the Reserve bank of India (RBI) adopted new CPI Consumer Price Index (CPI) as the key measure of inflation.

 

Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

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3 Comments on "Why India Adopted CPI to Measure Inflation?"

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Sanjay Mishra
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Sanjay Mishra
5 months 29 days ago

I gotta admit.. it’s a really good post. I didn’t give much thought to the WPI, CPI and why RBI adopted CPI over WPI. But, after reading your post, I understood why is it important to consumers and most of all, our country’s economy.
Good job!!

Neeraj Soni
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Neeraj Soni
5 months 29 days ago

I think we should look at this in both aspects. WPI and CPI are equally important for calculating inflation. Also, I understood the reason why RBI choose to measure inflation through CPI instead of WPI.

divyanshisharma
Member
5 months 28 days ago

Before i was not aware about the actual reason for CPI Adoption. I really appreciate author for providing this news.

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