Does India measure inflation accurately?

Inflation means a sustained increase in the aggregate or general price level in an economy. In simple words, it means that prices of goods are increasing.

In recent times, the burning issue is inflation, which is (figuratively speaking) making a hole in the consumers’ pockets. The latest figure of inflation, which is released by the government, is 7.83%. However, does India measure inflation accurately?

Of the two accepted methods for calculating inflation viz., Wholesale Price Index (or WPI, i.e., the index that is used to measure the change in the average price level of goods traded in wholesale market) and Consumer Price Index (or CPI, i.e., a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers), India uses WPI to measure inflation, whereas, all the major countries in the world use CPI to measure inflation. Now I am not saying that since many countries use CPI to measure inflation, India should also do the same. However, it is more logical to use CPI to measure inflation. The prime reason is that CPI gives us an idea that how much is the price rise actually affecting the consumers. WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level. Whereas the WPI is supposed to measure impact of prices on business, India uses that to measure the impact on consumers. Another problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. So, are we right to use WPI to measure inflation?

Avik Mukherjee
Globsyn Business School