Stagflation, recession, CPI, WPI

Subject: Economy

Context:

Decoding GDP contraction

Findings:

• Compared to the first quarter of last year, the income split showed growth in agriculture, minor declines in financial services, utilities (like electricity and water) and public administration, and major declines in retail, transportation, manufacturing, hotels, and construction.
• The expenditure split showed growth in government spending, private consumption was down by a quarter, and investments nearly halved. On both fronts there was little surprise in the GDP release.
• CPI-WPI inflation rates have been displaying divergent trends, with WPI staying in the negative territory, reflecting weak pricing power, while CPI has been rising, staying above the RBI’s comfort level indicating stagflation and recession.

Concept:

• Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money.

CPI:

• Inflation is measured using CPI. A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called consumer price index.
• The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation is releasing CPI (Rural, Urban, Combined) on Base 2012=100
• An inflation measure which excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products is called core inflation

WPI:

• Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses
• The numbers are released by the Economic Advisor in the Ministry of Commerce and Industry.

WPI Vs CPI

• While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services.
• Even as the WPI is used as a key measure of inflation in some economies, the RBI no longer uses it for policy purposes, including setting repo rates. The central bank currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.

Stagflation

• It is a seemingly contradictory condition described by slow economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e. inflation).
• Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP).

Recession

• Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.
• Such a slowdown in economic activities may last for some quarters thereby completely hampering the growth of an economy.
• In such a situation, economic indicators such as GDP, corporate profits, employments, etc., fall.
• This creates a mess in the entire economy. To tackle the menace, economies generally react by loosening their monetary policies by infusing more money into the system, i.e., by increasing the money supply.