WPI Inflation

Subject – Economy

Context – WPI inflation surges to 14.23% in Nov

Concept –

It is the most widely used inflation indicator in India.
Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
All transactions at the first point of bulk sale in the domestic market are included.
Major criticism for this index is that the general public does not buy products at wholesale price.
The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
WPI includes three components viz,
- Manufactured products – 64.2%
- Primary articles – 22.6%
- Fuel and power – 13.1%

CPI vs. WPI

WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the consumer level.
WPI does not capture changes in the prices of services, which CPI does.

Disinflation

Disinflation is a situation of decrease in the rate of inflation over successive time period. It is simply slowing of inflation.
Central banks will fight disinflation by expanding its monetary policy and lowering interest rates.

Deflation

Deflation is a decrease in general price levels throughout an economy.
Deflation, which is the opposite of inflation, is mainly caused by shifts in supply and demand.

Imported Inflation

When the general price level rises in a country because of the rise in prices of imported commodities, inflation is termed as imported.
Two key contributors to India’s imports are: Crude Oil and Gold. Rise in prices of these two products lead to rise in the import bill of the country.
- Fuel and power has 14.91% weightage in the Wholesale Price Index in India.
However, inflation may also rise due to the depreciation of the domestic currency, which pushes up the rupee cost of imported items.

Structural inflation

Structural inflation is the one prevailing in most developing countries.
The situation is due to the operation of the structural weakness (supply bottleneck, lack of infrastructure, etc.) existing in a developing economy.
Lack of adequate supply responses or production to increase in demand is the cause of structural inflation.
The Structuralist argues that the economies of developing countries like, Latin America and India are structurally underdeveloped as well as highly volatile due to the existence of weak institutions and imperfect working of markets.
Such economies face the problem of both shortages of supply, under utilisation of resources as well as excessive demand in some sectors.
For example
- Under developed transportation sector will increase logistic cost and will result in overall increase in prices of commodities
- Similarly, structural bottlenecks in agricultural sector such as APMCs, involvement of middlemen, imperfect price discovery leads to rise in food prices
- Resource constraints (such as government Budget constrain) to finance infrastructure development.