INFLATION, WPI-CPI

**Inflation:**
1. Rise in general prices of goods and services over time.
2. Can be caused by increased money supply, propensity to consume, investment
expenditure, fiscal deficit, or high growth.
3. Inflationary spiral: Increasing wages lead to higher prices, creating a cycle.

**Deflation:**
1. Inverse of inflation, occurs when inflation rate falls below 0%.
2. Can result from decreased money supply, increased propensity to save, reduced
investment, fiscal consolidation, or economic depression.

**Inflationary and Deflationary Gaps:**

1. Occur when aggregate demand doesn't match aggregate supply.
2. Inflationary gap linked to increased demand factors; deflationary gap linked to reduced
demand factors.

**Combatting Inflation:**
1. **RBI:** Implements tight monetary policy, making loans expensive.
2. **Government:** Uses tax benefits, reduces fiscal deficit, issues inflation-indexed bonds,
and regulates essential commodities.

**Combatting Deflation:**
1. **RBI:** Adopts an easy monetary policy, making loans cheaper.
2. **Government:** Provides tax benefits to consumers, increases public project expenditure
to boost demand.

**Neutral Rate of Interest:**

1. Essential for controlling inflation without hindering economic growth.
2. Balances loan rates to maintain purchasing power and economic growth.

**NAIRU (Non-accelerating Inflation Rate of Unemployment):**

1. Level of unemployment below which inflation tends to rise.
2. If unemployment falls below NAIRU, inflation is likely to increase.

**Philip's Curve:**
1. Shows an inverse relationship between inflation and unemployment.
2. Lower unemployment can lead to higher inflation due to increased consumer demand.

**Key Points:**

**Types of Inflation Based on Causation:**

1. **Demand-Pull Inflation:**
- Caused by excessive money in circulation leading to increased demand for goods and
services.
 - Examples include government programs like MNREGA, Pay Commission, PM KISAN,
and Universal Basic Income (UBI).

2. **Monetary Inflation:**
- Results from RBI printing more money, contributing to inflation.
- Linked to concepts like 'Monetising the deficit.'

3. **Cost-Push Inflation:**
- Occurs due to increased input costs, such as expensive crude oil, wage hikes from union
actions, or natural disasters affecting production inputs.

4. **Profit-Push Inflation:**
- Deliberate reduction of supply or price hikes by cartels, monopolists, or oligopolists driven
by greed or profit motives.

5. **Built-in Inflation:**
- Connected to the price/wage inflationary spiral, where rising inflation prompts workers to
demand higher wages, leading to higher prices and a cycle of inflation.

6. **Repressed Inflation:**
- During war, the government imposes price controls and rationing to control prices. When
these controls are lifted, prices rise to compensate for losses.

7. **Stagflation:**
- Characterized by persistent high inflation, high unemployment, and low economic growth.

8. **Skewflation:**
- Refers to episodic price rises in specific commodities while other goods and services
experience typical inflation.

9. **Headline Inflation:**
- Represents total inflation within an economy, often measured by CPI or WPI.

10. **Core Inflation:**

- Headline inflation minus inflation in food and energy articles, measured by CPI
(Headline) or WPI (Headline).

11. **Reflation:**
- Stimulating the economy from a deflationary path to an inflationary one through actions
like increasing money supply and fiscal stimulus.

12. **Structural Inflation:**

- Inflation inherent in a particular economic system requiring a change in economic policy
to eliminate it.
- Eg. include MSP policies for specific crops and issues related to APMC reforms affecting
inflation
**Inflation Types Based on Speed/Quantum:**

1. **Creeping Inflation:**
- Approximately 4% per annum.
- Considered safe and essential for job creation and economic growth.

2. **Walking/Trotting to Running Inflation:**

- More than 4% is Walking/Trotting, and Running Inflation is when it shifts to double digits.

3. **Galloping/Hyperinflation:**
- Very high levels (20%-100%-even 10,000% or more).
- Observed in historical instances like post-Treaty of Versailles Germany and modern-day
cases in Venezuela, Zimbabwe, and Iran due to misgovernance.

4. **Runaway Inflation and Runaway Depreciation:**

- **Runaway Inflation:**
- Prices rise at an extremely fast and uncontrollable rate.
- **Runaway Depreciation:**
- Local currency faces an extremely rapid and significant decline in value relative to other
currencies.

**Inflation's Effects on Individuals:**

**During Inflation:**
- **Businessman, Borrowers:**
- Profitable for businessmen as final product prices rise faster than raw material costs.
- Borrowers make losses as final product prices fall faster than production costs, leading to
layoffs.

- **Fixed Income Groups, Lenders:**

- Salaried individuals and pensions suffer during inflation.
- Lenders suffer as the real purchasing power declines due to falling real interest rates.

- **Currency Exchange Rate:**

- Weakening of the currency's exchange rate as purchasing power decreases.
- Foreigners become less keen to buy from the country, impacting the exchange rate.

**During Deflation:**
- **Businessman, Borrowers:**
- Businessmen face losses as final product prices fall faster than production costs, leading
to layoffs.

- **Fixed Income Groups, Lenders:**

- Benefit from increased value (purchasing power) of money.
- Some workers may lose jobs during deflation.

- **Currency Exchange Rate:**

- The currency's exchange rate strengthens as purchasing power increases.
 - Foreigners can purchase more quantity of goods from the country.

- **Laspeyres Formula:**
- Used in calculating WPI, CPI, and IIP indices.
- Involves a weighted arithmetic mean of a commodity basket, tracking price/production
against the base year.

- **Paasche Index:**
- Developed by German economist Hermann Paasche.
- Indicates the cost of today's commodity basket at the base year's price.

- **Fisher Index:**
- Proposed by American Economist Irving Fisher.
- Utilizes the geometric mean of Laspeyres and Paasche indices for a more accurate
representation.

Wage Rate Index (WRI)

- Prepared by the Labour Bureau, affiliated with the Ministry of Labour.
- Surveys and monitors wages across industries.
- Reforms in 2021:
- Shifted base year from 1963-65 to 2016.
- Expanded industry coverage, including synthetic textiles, textile garments, printing,
publishing, footwear, petroleum, chemicals, gases, fertilizers, drugs, and medicines.
- Utility: Aids in designing minimum wages under the new wage code law.

Inflation rate %: how is it calculated?

CPI Inflation Rate( Nov 2019)=
[(Current Month−Same month last year)/
Same month last year)] ∗100

“Refined Core Inflation”?

- **Core Inflation Calculation:**

- Traditionally excludes 'food and beverages' and 'fuel and light' from overall inflation.
- In NSO's CPI, petrol and diesel are categorized under 'transport and communication,' not
'fuel and light.'
 - This categorization makes direct calculation of core inflation challenging using NSO data
tables.

**Key Points:**

**Inflation Measurement and RBI Focus:**

- CPI inflation higher in urban areas due to housing prices and component weightage
differences.
- Rural inflation remained above urban in 2022, attributed to food, fuel, and clothing inflation.
- Debate on RBI's focus: Some suggest targeting core CPI (excluding food and fuel), but
challenges noted for India.

**Food Inflation Concerns:**

- Food prices, especially in India, are volatile, affecting households with uncertain income
sources.
- RBI urged to consider both core inflation and food inflation for the well-being of citizens.

**Suggestions for RBI:**

1. Focus more on core inflation while separately monitoring food inflation.
2. Update CPI components to reflect changing food habits from 2011-2020.
3. Include E-commerce prices in CPI surveys due to increased transactions.

**Consumer Food Price Index (CFPI):**

- Prepared from CPI survey data, CFPI includes cereals, meat, milk, fruits, vegetables, and
more.
- Excludes non-alcoholic beverages, prepared meals, snacks, sweets, pan, tobacco, and
intoxicants.

**Wholesale Price Index (WPI):**

- Monthly components include manufactured products, primary articles (food, eggs, etc.),
and fuel & power.
- WPI growth has been zigzag, currently showing deflationary tendencies.

**Overall Economic Context:**

- Inflation concerns, especially related to food, are vital for India's diverse economic
landscape

**Key Points:**

**Wholesale Price Index (WPI) Trends:**

- WPI experienced fluctuations:
- Jan-Apr 2020: Decline due to global crude oil price drop during lockdown.
- 2021: Surge in energy, food, and non-food commodities, leading to increased WPI.
- Divergence between WPI and CPI due to indirect taxes, CPI's higher weightage to food,
and the different tax treatments.

**Factors Influencing WPI:**

- Global commodity price surge in 2021 due to vaccination and economic revival in the USA
and EU.
- Increased costs in production, distribution, and labor shortages contributed to rising
wholesale prices.

**Divergence and Expectations:**

- Divergence between CPI and WPI observed in 2020, with WPI in negative figures and CPI-
C inflation over 6%.
- Expected reduction in the divergence over time.

**Other Inflation Indices:**

- Producer’s Price Index (PPI) includes both goods and services, unlike WPI that covers only
goods.
- Experimental Service Price Index introduced for various services like railway, port, air, and
telecom services.
- Inflation Expectation Surveys conducted by RBI and IIM Ahmedabad for households and
businesses.

**Housing Inflation Monitoring:**

- National Housing Bank (NHB) uses RESIDEX to monitor residential house prices in
selected cities.
- RBI Home Price Index notes increased demand for housing due to economic revival
measures.

**Inflation Control Measures:**

- Government actions in 2022 to control non-agricultural inflation, including decreased excise
duties and reduced customs duty on imports.
- Challenges for 2023 include global factors like China's recovery, USA's rising oil demand,
and climate change affecting food production.

**Thalinomics – Food Affordability:**

- Thalinomics concept: Estimating the cost of a Thali (platter of food) to gauge food
affordability.
- Between 2015-2018, Thali prices reduced across all regions for both veg and non-veg
Thalis.
- Thali affordability increased for poor families, resulting in significant annual savings.

**Government Schemes and Food Affordability:**

- Appreciation for Modi government schemes in increasing food production and making food
more affordable, leading to positive impacts on households.

**Key Points:**

**Index of Industrial Production (IIP):**

1. Monthly index prepared by NSO with a base year of 2011 and Laspeyres Formula.
2. Measures production of 407 item groups in various classifications.
3. Use-based classification includes Primary goods, Capital goods,
Infrastructure/construction goods, Intermediate goods, Consumer durables, and Consumer
non-durables.
4. Sector-based classification includes Mining, Manufacturing, and Electricity.
5. IIP trend: Fell in 2018 and 2019 due to NPA problem, ILFS-NBFC crisis, protectionism,
and decreased demand in certain sectors. Recovered in 2020 post-COVID lockdown.

**Index of Eight Core Industries:**

1. Prepared by EA-DPIIT, focusing on eight core industries with Refinery Products having
the highest weight.
2. Core industries collectively command 40.27% weight in the overall IIP.
3. Industries include Refinery Products, Electricity, Steel, Coal, Crude Oil, Natural Gas,
Cement, and Fertilizers.

**Miscellaneous Indices:**
1. Annual Survey of Industries (ASI): Covers registered units under factories act and
electricity companies.
2. Index of Service Production (ISP): Experimental index covering services like Banking,
Insurance, Education, Telecom, and Transport.
3. Services Business Activity Index: Also known as Services Purchasing Managers’ Index.
4. RBI’s OBICUS: Quarterly survey assessing consumption and investment demand.
5. Economic Health Indices by Commercial Banks: Includes HSBC’s PMI and SBI’s
Composite Index.
6. Baltic Dry Index: Measures the cost to transport raw material by sea, indicating world
economic growth or contraction.

**High-Frequency Indicators (HFIs):**

1. HFIs provide more up-to-date information compared to slow-moving indicators like annual
GDP.
2. Examples include Monthly Tractor Sales, which can indicate farmer distress or bank loan
issues affecting agriculture production.
3. HFIs help in proactive decision-making by providing timely economic insights.

**Pros and Cons of High-Frequency Indicators (HFIs):**

**Pros:**
1. **Real-time Response:** Enables quick responses for policy-makers.
2. **Better Targeting:** Provides precise signals for targeted interventions.
3. **Up-to-Date Information:** Offers current updates on economic trends.

**Cons:**
1. **Noise to Signal Ratio:** Risk of market fluctuations influenced by rumors or external
factors.
2. **Market Instability:** Rapid changes can lead to instability for investors and businesses.
3. **Limited Reflectiveness:** Challenges in distinguishing actual economic trends from
temporary disturbances caused by external factors.