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Understanding the Inflation Data for February 2021
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- From OEA's office: The Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade has released the Wholesale Price Index (WPI) for the month of February, 2021. While CPI figures are released by the MoSPI, WPI is handled by the OEA.
- Pointers:
- Wholesale Price-Inflation - It increased for the second consecutive month to 4.17%. This is the highest since November 2018, when wholesale inflation was at 4.47%. The WPI inflation was 2.03% in January 2021 and 2.26% in February 2020.
- Reason - Increase in inflation in food articles, fuel & power has led to this surge. Food Inflation: The food articles in February saw 1.36% inflation which in January stood at (-) 2.80%. Retail inflation: Based on the Consumer Price Index (CPI), it was at 5.03% in February.
- Wholesale Price Index (WPI): It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. Published by the Office of Economic Adviser, Ministry of Commerce and Industry. It is the most widely used inflation indicator in India. Major criticism of 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.
- Consumer Price Index: It measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO). The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use. The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear.
- Four types of CPI: These are - (i) CPI for Industrial Workers (IW), (ii) CPI for Agricultural Labourer (AL), (iii) CPI for Rural Labourer (RL), and (iv) CPI (Rural/Urban/Combined). Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the NSO in the Ministry of Statistics and Programme Implementation. Base Year for CPI is 2012.
- RBI's MPC: The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) had adopted the CPI as its key measure of inflation.
- CPI vs. WPI: The 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.
- Inflation: It refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time, and is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth. But a moderate level of inflation is required in the economy to ensure that production is promoted. In India, inflation is primarily measured by two main indices - WPI & CPI - which measure wholesale and retail-level price changes, respectively.
- Knowledge centre:
- Deflation - Deflation refers to a general decline in prices for goods and services, associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. Whether the economy, price level, and money supply are deflating or inflating changes the appeal of different investment options. Deflation causes the nominal costs of capital, labour, goods, and services to fall, though their relative prices may be unchanged. Deflation consumers because they can purchase more goods and services with the same nominal income over time. But it may be a danger if persistent. Japan has faced it since late 1980s.
- Reflation - Reflation is a fiscal (or monetary policy) aimed at expanding output, stimulating spending, and curbing the effects of deflation, after a period of economic uncertainty or a recession. The term may also be used to describe the first phase of economic recovery after a period of contraction. Policies include tax cuts, infrastructure spending, increasing the money supply, and lowering interest rates. {Reducing taxes: Paying lower taxes makes corporations and employees wealthier. It is hoped that extra earnings will be spent in the economy, lifting demand and prices for goods;Lowering interest rates: Makes it cheaper to borrow money and less rewarding to stow capital away in savings accounts, encouraging people and businesses to spend more freely; Changing the money supply: When central banks boost the amount of currency and other liquid instruments in the banking system the cost of money falls, generating more investment and putting more money in the hands of consumers; Capital Projects: Large investment projects create jobs, boosting employment figures and the number of people with spending power}
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