Retail inflation spiked to nearly 7% in July, impacting household spending. But even with all the buzz surrounding this figure, do you know how inflation is tracked and calculated? Here’s how the inflation figures are arrived at, the indices used to measure them, and what they mean.
What is CPI?
Data published by the National Statistical Office on Thursday showed that retail inflation accelerated to 6.93% in July from 6.23% in the preceding month, with food inflation rising to 9.62% from the June level of 8.72%.
Inflation can be described as the general rise in the price of goods and services in an economy over time. It’s calculated by tracking the increase in prices of essentials. The primary index that tracks the change in retail prices of essential goods and services consumed by Indian households is the Consumer Price Index or CPI.
The index assigns different weights to various goods and services in the basket and tracks the movement of their prices. It also tracks the price movement of the entire basket on a pan-India level to calculate the overall inflation figure or CPI inflation.
But according to Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers, CPI is not the cost of living index, and is, therefore, not an accurate reflection of consumer spending.
“The weightage of food in the CPI is close to 50%, but most households don’t spend nearly that much of their overall expenditure on food. What we spend more on are services such as education, health care and transportation, where inflation levels are much higher,” he said.
What is WPI?
The other index that measures inflation is the Wholesale Price Index (WPI). While retail inflation looks at the price at which the consumer buys the product, WPI is measured based on prices at the wholesale level.
“There are two layers between the wholesale price and retail price, one is the additional cost of transportation from the wholesale to the point of sale, and the other is the retail mark-up. During the lockdown, for instance, it was more difficult to transport goods, and that additional cost got added to individual prices,” said Hajra. Similarly, if there is scarcity, the retail margin goes up, adding to the price.
Another difference between the two indices is that the wholesale market is only for goods, you cannot buy services on a wholesale basis. So WPI does not include services, whereas the retail price index does. “The pricing norms of wholesale and retail are also different.
Certain items on WPI, such as fuel, are also closely linked to international prices, creating a gap between the figures on this index and the CPI,” said Hajra.
While CPI is the most relevant index for the consumer as it shows the increase in their actual outgo, it is not a completely accurate cost of living indicator since it focuses on certain goods and services more than others.
The net effect of inflation is that the value of your money decreases over time, so make sure to align and diversify your investments so that you can inflation-proof your corpus.