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15 Dec 2016

Declining Trend in CPI - WPI Inflation Spread

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CPI for December 2016 declined 0.23% on a month on month basis and rose 3.41% year on year, lowest level since November 2014.

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Arjun Parthasarathy

CPI for December 2016 declined 0.23% on a month on month basis and rose 3.41% year on year, lowest level since November 2014.In December 2015 CPI inflation was at 5.61% while for November 2016 it was at 3.63%. Consumer Food Price Index (CFPI) increased 1.84% on month on month basis and rose 1.37% year on year against 6.40% in December 2015 and 2.03% in November 2016.Yearly vegetables price fell 14.59% also Pulses and products soften 1.57%.Vegetables weight in index is 6.04% and Pulses and products has 2.38% weights in index.Clothing and footwear,Housing inflation was stick while Fuel and light inflation rose to 3.77% levels in December 2016 against 2.80% in November 2016

November 2016- CPI

As demonetisation has lowered demand for goods and services in the cash economy CPI for November 2016 printed at its lowest levels since November 2014 and the CPI-WPI spread fell significantly to 0.48%, was against 9.01% in September 2015.

CPI for November 2016 declined 0.15% on a month on month basis and rose 3.63% year on year, lowest level in 2 years . In November 2015 CPI inflation was at 5.41% while for October 2016 it was at 4.20%. Consumer Food Price Index (CFPI) decreased 0.80% on month on month basis and rose 2.11% year on year against 6.07% in November 2015 and 3.32% in October 2016.Yearly vegetables price degrew 10.29% while Sugar and Confectionery rose 22.40%.Vegetables weight in index is 6.04% while Sugar and Confectionery has 1.36% weights in index.

November 2016- WPI

Wholesale Price Index (WPI) annual rate of inflation for November 2016 was at 3.15% year on year against 3.39% in November 2015. In November 2015 it was at -2.04%.

CPI-WPI Inflation spread

October 2016- CPI

Demonetisation has lowered inflation expectations as demand for goods and services in the cash economy could fall. CPI inflation fell to a 14 months low in October 2016 on the back of fall in food prices.

CPI for October 2016 rose 0.38% on a month on month basis and 4.20% year on year, lowest level since August last year. In October 2015 CPI inflation was at 5.00% while for September 2016 it was at 4.39%. Consumer Food Price Index (CFPI) increased 0.22% on month on month basis and 3.32% year on year against 5.25% in October 2015 and 3.96% in September 2016.RBI has an inflation target of 5% for March 2017, the October 2016 CPI is 80 bps below the target.

October 2016- WPI

Wholesale Price Index (WPI) annual rate of inflation for October 2016 was at 3.39% year on year against 3.57% in October 2015. In October 2015 it was at -3.81%.

September 2016- CPI

For September 2016 CPI printed at 130.8,declined -0.23% on a month on month basis and increased 4.31% year on year,lowest since August 2015 . In September 2015 CPI inflation was at 4.41% while for August 2016 it was at 5.05%. Consumer Food Price Index (CFPI) decreased -1.16% on month on month basis and increased 3.88% year on year against 3.88% in September 2015 and 5.91% in August 2016.RBI has an inflation target of 5% for March 2017, the September 2016 CPI reading is 69 bps below the target, which is positive for policy accommodation.As monsoon has been normal,crop production may not be affected which in turn can mean CPI inflation can trend lower going ahead.

September 2016- WPI

Wholesale Price Index (WPI) annual rate of inflation for September 2016 was at 3.57% year on year against 3.74% in August 2016. In September 2015 it was at -4.59%.For June 2016 WPI inflation rate is revised t0 2.12% from 1.62% previously

August 2016-CPI

CPI reading for August 2016, while positive for policy accommodation does not increase chances of a rate cut by the RBI in its 4th October 2016 policy review. The primary concern for RBI will be Fed’s rate outlook in its September 2016 meet and the reaction of global markets to Fed rate hikes if any.

For August 2016 CPI (Consumer Price Index) remained unchanged on a month on month basis and increased 5.05% year on year, a five month low. In August 2015 CPI inflation was at 3.74% while for July 2016 it was at 6.07%. Consumer Food Price Index (CFPI) decreased -0.58% on month on month basis and increased 5.91% year on year against 2.20% in Ausgut 2015 and 8.35% in July 2016. August CPI inflation rate is lowest since April 2016 on account of controlled consumer food prices.RBI has an inflation target of 5% for March 2017 and August 2016 CPI reading is closer to the target, which is positive for policy accommodation. Core inflation has stayed at levels of below 5% for August indication no real pricing pressures in the economy.

August  2016- WPI

Wholesale Price Index (WPI) annual rate of inflation for August 2016 was at 3.74% year on year against 3.55% in July 2016. In August 2015 it was at -5.06%.For June 2016 WPI inflation rate is revised t0 2.12% from 1.62% previously

July 2016-CPI

For July 2016 CPI (Consumer Price Index) increased 0.77% on a month on month basis and by 6.07% year on year. In July 2015 CPI inflation was at 3.69% while for June 2016 it was at 5.77%. Consumer Food Price Index (CFPI) rose 1.31% on month on month basis and 8.35% year on year against 2.15% in July 2015 and 7.79% in June 2016. CPI inflation rose on the back of higher food prices. August CPI inflation rate is lowest since April 2016 on account of controlled consumer food prices.

July 2016- WPI

Wholesale Price Index (WPI) annual rate of inflation for July 2016 printed at 3.55% year on year against 1.62% in June 2016. WPI turned positive in May 2016 after 16 months of negative growth.

CSO (Central Statistics Office) in February 2015 revised the Base Year of CPI series from 2010=100 to 2012=100. The weighting diagrams have based on the results of CES ( Consumer Expenditure Survey) (2011-12).

CPI (Consumer Price Index) Components weights:

Food, Beverages and Tobacco – 45.86%

Fuel and Light – 6.84%

Clothing, bedding and footwear- 6.53%

Housing – 10.07%

Miscellaneous (Education, amusements, Transport) – 28.32%

CPI for rural and urban is calculated separately and then combined to get general CPI index reading.

Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption. CPI numbers are  used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices.

Monthly price data are collected from 1114 markets in 310 selected towns by the Field Operations Division of NSSO and the specified State/UT Directorates of Economics and Statistics and from 1181 selected villages by the Department of Posts.  The prices are being collected through Web Portals.

What is the criteria of Selection of components:

(i) to include all PDS items;

(ii) to include all items accounting for 1% or more of total expenditure at sub-group level;

(iii) to include all items accounting for more than specified percentage of total expenditure of all consumption items: Food, Housing & Miscellaneous > 0.04% ;Fuel > 0.03% ;Clothing > 0.02%

(iv) to include all items for which more than 75% households have reported consumption.

Compilation of Indices:

Compilation of CPI  generally consists of two stages (i) calculation of price indices for elementary aggregates (item level indices) and (ii) the aggregation of  elementary price indices to higher level indices using the weights associated with each level. Laspeyres formula is used for aggregation of indices.

Lasperyre s formula, which has a fixed base- year weighting diagram operative through the entire life span of the series. The formula used is:
I = sum{(Ii x Wi)}/ sum(Wi)

Where
I= Index Number prices of a sub- group/group/major group/All
commodities Wi= The weight assigned to the ith item/sub- group/group/major group
Ii= Index of the ith item/sub- group/group/major group

Price relatives are calculated as the percentage ratios by dividing the current price by the base period price and multiplying the quotient by 100. The commodity index is arrived at as the simple arithmetic average of the price relatives of all the varieties included under that commodity.

Detailed CPI Components

WPI 

The price index is an indicator of the average price movement over time of a fixed basket of goods and services. The constitution of the basket of goods and services is done keeping in to consideration whether the changes are to be measured in retail, wholesale or producer prices etc. The basket will also vary for economy- wide, regional, or sector specific series.The Wholesale Price Index (WPI) number is a measure of wholesale price movement for the economy.

WPI (Wholesale price Index) Components weights:

Primary Articles (Food articles, minerals, non-food articles) – 20.12%

Fuel and Power – 14.91%

Manufactured products – 64.97%

The New Series with 2004- 05 as the base has 676 items in the commodity basket. There has been a significant increase in number of items and price quotations for each item, particularly in the manufacturing segment for  better reflect the structural shifts and to make WPI more broad based.Total 5482 price quotations are collected from various region.

Compilation of Indices:

Compilation of WPI  generally consists of two stages (i) calculation of price indices for elementary aggregates (item level indices) and (ii) the aggregation of  elementary price indices to higher level indices using the weights associated with each level. Laspeyres formula is used for aggregation of indices.

Lasperyre s formula, which has a fixed base- year weighting diagram operative through the entire life span of the series. The formula used is:
I = sum{(Ii x Wi)}/ sum(Wi)

Where
I= Index Number prices of a sub- group/group/major group/All
commodities Wi= The weight assigned to the ith item/sub- group/group/major group
Ii= Index of the ith item/sub- group/group/major group

Price relatives are calculated as the percentage ratios by dividing the current price by the base period price and multiplying the quotient by 100. The commodity index is arrived at as the simple arithmetic average of the price relatives of all the varieties included under that commodity.

International Practice:

The WPI has been replaced in most countries by Producer Price Index (PPI) due to the broader coverage provided by the PPI in terms of products and industries and the conceptual concordance between the PPI and system the national account.Many of the OECD countries measure inflation based on Producer Price Index (PPI) while some others use only WPI (Japan, Australia, Greece, Norway and Turkey) and a mix of both.For policy formulation and analytical purpose, measurement of price changes from producers and consumers prospective is considered  more relevant and  superior compared to one at wholesale level.

 

Disclaimer:

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