All about the new inflation index

Inflation for the month of August stood at 8.51 per cent, according to the new Wholesale Price Inflation (WPI) series released by the government on Tuesday.

As per the old series with a base year of 1993-94, WPI inflation stood at 9.5 per cent for the month, according to the commerce ministry.

Overall inflation in August witnessed a fall of 1.27 percentage points from 9.78 per cent in the month of July, as per the new series, which considers 2004-05 as the base year.

As per the new WPI index, inflation was 0.31 per cent in August last year. "It (the new index) will help in informing both the government and people how the prices are moving.

This will give a robust picture and reflect actual price movement," Commerce Minister Anand Sharma said.

He said food inflation is still a cause of concern. As per the new WPI data released on Tuesday, prices of primary articles -- food, non-food articles and minerals -- shot up by 15.76 per cent on an annual basis.

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Finance Minister Pranab Mukherjee said: "Inflationary pressure is still there because food prices have gone up because of the erratic monsoon, but I do hope annualised inflation would be much lower in the new series."

Year-on-year, food articles became dearer by 14.64 per cent, while prices of non-food articles likes fibres and oilseeds soared by 16.04 per cent. Minerals became 23.82 per cent more expensive.

Fuel and power, including LPG and petrol, registered an annual inflation of 12.55 per cent. Manufactured products -- foods products, beverages, tobacco, cotton textiles, wood, paper, etc. -- saw an average price rise of 4.78 per cent on an annual basis.

However, sugar became cheaper by 0.63 per cent year-on- year and leather and leather products also witnessed a fall of 0.08 per cent.

Click NEXT to find out more about inflation, how it hurts you and the new WPI index

What is inflation? Why do prices rise?

Inflation is a rise in the prices of goods and services in an economy over a period of time. When the price rises, each unit of currency buys fewer goods and services. The purchasing power of money falls when inflation is high. An inflationary situation is when there is 'too much money chasing too few goods'.

What are the negative and positive aspects of inflation?

Inflation leads to a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings. The positive effects include easing an economic recession and reducing the level of debt.

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How is inflation calculated in India?

India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. WPI is the index used to measure the change in the average price level of goods traded in wholesale market.

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

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What is the new WPI index all about?

The government has changed the method of calculating inflation rate to effectively tap the variation in prices in tune with the changing times.

A number of new products have been included in the new Wholesale Price Index (WPI) which would be released every month. About 200 redundant items have been dropped from the index.

The government would release the overall wholesale inflation figure every month, while part of the data for primary articles, which contains food inflation, and the fuel category would be released weekly.

Some of the items like type-writers, video cassette recorders (VCRs) etc would not find place in the new series.

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What are the new items included in the WPI index?

More consumer items used by the middle class has been included in the new index. Some of the important items included in the new series basket are flowers, lemon and crude petroleum in primary articles and ice cream, canned meat, palm oil, readymade/instant food powder, mineral water, computer stationary, leather products, scooters/ motorcycle tyre, polymers, petrochemical intermediates, granites, marbles, gold and silver, construction machinery, refrigerators, computers, dish antenna, transformer, microwave oven, communication equipment (telephone instruments), TV sets, VCD, washing machine and auto parts in manufactured products.

The new WPI series has 241 more items than the old index. With the additional items, the WPI now measures a total of 676 items against 435 earlier, while the number of quotations or sources for collating the price data would be 5,482 from 1,918 previously.

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What will be the new weightage?

The new series would also have a different weight, in line with the changes in the economy. The weight of the primary articles category in the WPI would now be 20.11 per cent compared to 22.02 per cent earlier, fuel and power would be 14.91 per cent from 14.22 per cent, while that of manufactured products would be 64.97 per cent against 63.74 per cent.

What is Consumer Price Index?

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers.

It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under  CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.