03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Mrunalhttp://mrunal.org

[Economy]IndexTheory:WPI,CPI,IIP,Components,
BaseyearCorevsHeadlineinflation,Laspeyres
formulaexplained
PostedBySupportStaffOn21/08/2014@3:39amInEconomy|77Comments

Prologue
[Act1]WHOcalculatesWPI,CPI,IIP?
[Act2]WHENtheypublishWPI,CPI,IIP?
[Act3]WHEREdotheygetdataforWPI,CPI,IIP?
WPIDataCollection
CPIDatacollection
IIPDataCollection
[Act4]WHATarethecomponentsofWPI,CPI,IIP?
#1:WPIcomponentsofWholesalepriceindex
WhatisHeadlineinflationWPI?
WhatisCoreinflationWPI?
#2:CPIcomponentsofConsumerPriceIndex
WhatisHeadlineCPIinflation?
WhatisCoreCPIinflation?
ConsumerFoodPriceIndex(CFPI)
#3:IIP:SectorwiseComponents?
IIP:GoodswiseComponents?
[Act4]WHYREVISEWPI,CPI,IIPseries?
RevisionofWholesalePriceIndex(WPI)
WPI:Newitemsadded:
SaumitraChaudhuriCommitteeonWPI
RevisionofConsumerpriceindexseries(IIP)
RevisionofIndustrialIndexproduction(IIP)
Comparison:WPI,CPI,IIP
[Act5]WHYWPI,CPI,IIPimportant?
[Act6]Otherindexes
Serviceperformanceindices(SPI)
BalticDryindex
ProducerPriceIndex(PPI)
Somemoreindexes
[Act7]Laspeyresformula

Prologue

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

1/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Prologue
Chapter4:PricesandMonetaryManagement.Threesubparts
Monetarymanagement,measuresofmoneysupply,UrjitPatel
IndexesTheory:WPI,CPI,IIP,Servicesindexandothers
IndexesCurrent:SurveyobservationsonWPI,CPI&IIP,Howtocombatinflation.
Waitwhathappenedtoremainingchapters?
Ch.8to13publishedasarticles.
Chapter1to35to7availableaspowerpointandvideos.(Willreleasethemasarticlesafter
prelimsanditsunofficialanswerkey.)

[Act1]WHOcalculatesWPI,CPI,IIP?

OfficeoftheEconomicAdviser
WPI InDIPPDepartmentofIndustrialPolicyandPromotion
InMinistryofCommerce&Industry.
CPI

CentralStatisticsOffice(CSO)
MinistryofStatisticsandProgrammeImplementation(MOSPI)

IIP SameasCPI

[Act2]WHENtheypublishWPI,CPI,IIP?
WPIdatapublication
Weekly

EveryThursday:PrimaryArticlesandFuelGroup
IfThursdayisholidaythennextworkingday

Monthly 14thofEverymonth:allcommodities
Abovetwoareprovisionalbecausesomepricesarenotavailable.
Final

Finallistreleasedtwomonths(~EIGHTweeks).Whentheygetauthenticpricedata
forallcommodities.

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

2/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Ifholiday,thenWPIdatareleasednextworkingday.
CPIandIIP:Whenpublished?
Monthlybasis:forurban,rural,allIndia.
CPI Annual:withlagofonemonth.
State/UTsseparateCPIsreleasedonlyiftheyprovide80%ofthenecessarydata.
monthlybasiswiththetimelagofsixweeksfromthereferencemonth.
IIP AlthoughIIPjustashorttermindicator.TheactualresultcomealongwithAnnual
SurveyofIndustries(ASI).

[Act3]WHEREdotheygetdataforWPI,
CPI,IIP?

Sofarweknow,whomakestheindex,andwhentheyreleaseit.ButWHEREdotheygetthe
statisticalinputs?

WPIDataCollection
Primaryarticles

Respectiveministries,dept,PSU,StateGovernments

Fuelandpower

Sameasabove

Manufacturedproducts Leadingmanufacturingunits
total

676items

ProblemsinDatacollection
Sincethecollectionofpricesisonvoluntarybasis,theflowofpricedata,especiallyfrom
manufacturingunits,becomesirregularleadingtoproblemsincompilationofWholesaleprice
index.
EconomicAdviserhascreatedawebportal,sofactoryownerscandirectlysupplydata.But
momentumnotpickedupyet.Seemstheyretoobusychangingprofilepicsonfacebook.
Therefore,EconomicAdvisorshasmadearrangementwithNSSOtocollectpricedatafrom
themanufacturingunits,untilwebportalbecomespopular.

CPIDatacollection
WhogivesdataforConsumerpriceindex(CPI)?
Urban
areas

NSSOofficialssurvey.DataenteredintoNICwebportal.

Rural

NSSOofficials+PostalOfficials(ifNSSOcantreach).Notallvillagessurveyed,

areas

only~1200villages.

IIPDataCollection
WhogivesdataforIndexofIndustrialproduction
(IIP)?
IIPinformationSupplier

Items

DIPP:DeptofIndustrialPolicy&Promotion 430
http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

3/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

IndianBureauofMines

61

Iron&SteelJointCommittee

47

Chem.&PetrochemicalsDept.

47

TextileCommissioner

44

VanaspatiDirectorate

11

JuteCommissioner

11

Petroleumministry

11

RailwayBoard

FertilizerDepartment

CoalController

DirectorateofSugar

SaltCommissioner

TeaBoard

CoffeeBoard

CentralElectricityAuthority(powerMin.)

Totalitems

682

[Act4]WHATarethecomponentsof
WPI,CPI,IIP?
#1:WPIcomponentsofWholesalepriceindex

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

4/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

EconomicAdvisor,Lespeyersformula,Baseyear2004.
Threecategories,indescendingorderofWeight
WPIcomponents

weight

ManufacturedProductsInternalweight:Chemical>metal>food 64.97
PrimaryArticlesinternalweight:Food>Nonfood>Mineral

20.12

Fuel&Powerinternalweight:Mineraloil>Electricity>Coal

14.91

totalweight

100

Thesethreecategoriesarefurthersubdividedintopictureworth1000words.

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

5/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

6/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

WhatisHeadlineinflationWPI?
Numberwegetfromallcomponentsviz.primary,fuelandmfg.

WhatisCoreinflationWPI?
coremeans,weshouldignorefoodandfuelpart.
So,coreinflation=OnlyWPIofNonfoodmanufacturingindustries.
HeadlineWPI(primary+fuel+foodmfg.industries)

#2:CPIcomponentsofConsumerPrice
Index

CSOcalculatesusingLespeyersformula,Baseyear2010
Fivecategoryofitems.IvearrangedthemindescendingorderofWEIGHT(CombinedAll
India)
CPIcomponents

Rural Urban Combined

Food,beverages,tobacco 59.31 37.15 49.71

Misc.Healtheduetc.

24.91 28

26.31

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

7/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Housing

NA

22.53 9.77

Fuel,light

10.42 8.4

9.49

Clothing,bedding,footwear 5.36 3.91

4.73

Total

100

100

100

Mindit:RuralCPIdoesntconsiderHousinginflation.

SubcategoriesRanking:CPI(Combined)
Ranking

withinthathighestweightagegivento

food,bev.,tobacco

Cereal>Milk>Veggies>..Sugar(lowest)

Fuelandlight

nosubgroup

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

8/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Fuelandlight

nosubgroup

clothing,bedding,

(Clothingbedding)>Footware

footware
Housing

Nosubgroup.
Transport>Medcare>Householdrequisites>>Recreation

Misc.

(lowest)

WhatisHeadlineCPIinflation?
Thenumberyougetfromcombineddataofabovecategories.

WhatisCoreCPIinflation?
CoreCPI=HeadlineCPIMINUS(foodandfuelcomponents.)

ConsumerFoodPriceIndex(CFPI)
BythesamegoodfolkswhocalculateCPI(=CSOwalla)
UsingsameLaspeyreformula
Usingsamebaseyear:2010
IftotalweightofCPI=100,thenFoodpriceindex=~52%ofitsweight

Componentsindescendingorder
Components

Rural Urban Combined

Cerealsandproducts

36.71 28.51 34.16

Milkandproducts

16.53 21.59 18.1

Vegetables

12.64 12.93 12.74

Oilsandfats

8.98 9.44

9.13

Egg,fishandmeat

6.5

6.77

Pulsesandproducts

6.25 6.11

6.2

Sugaretc.

4.64 4.11

4.47

Fruits

3.65 6.14

4.43

7.38

Condimentsandspices 4.1

3.79

Total

100

100

100

SofarwearedonewithcomponentsofWPI,CPIandfoodinflation.Movingon

#3:IIP:SectorwiseComponents?

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

9/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Weight:Mfg>>Mining>>Electricity
sector

weight items itemgroups

Manufacturing 755.27 620

397

Mining

141.57 61

Electricity

103.16 1

total

1000

399

682

Mindit:Totalweightis1000.So,ifyouwantpercentageweight,thenshiftdecimalonepoint
toleft.
Forexample:manufacturingweight=75.5%

IIP:GoodswiseComponents?
IIPdatareleasedintwoformats
Sectorwise:Mining,mfg,electricity(thatwejustsawabove.)
Goodscategorywiseusingthesamecomponentsasabove,butdatapresentedforgoods
categorywise.asshownbelow.
Anybulkrawmaterial/productusedinmanufacture.HighSpeedDiesel,
BasicGoods AviationFuel,Kerosene,Urea,Cementallkinds,Granites,iron,copperand
http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

10/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Electricity
Plants,machineryandgoodsusedforfurtherinvestments.Boilers,

Capital

compressors,engines,Transformers,CommercialVehiclesandallmachineries

Goods

likeTextileMachinery,PrintingMachineryetc.

Intermediate usedformanufacturingofanotherproduct.Cottonyarn,Plywood,Adhesives,
Goods

Aluminumandsteelpipesetc.

Consumer

canbeusedformorethan2/3years).PressureCooker,AC,tyre,Tv,mobile,

durable

automobile,GemsandJewelryetc.

Consumer

cantbeusedforlongperiods.FruitPulp,edibleoil,milkpowder,tea,

nondurable Cigarettes,Apparels,Newspapers,Antibioticsetc.

Goodswiseweight,In
decreasingorder:
IIP
BasicGoods

Weight
456.82

Consumernondurable 213.47
IntermediateGoods

156.86

CapitalGoods

88.25

Consumerdurable

84.6

totalweight

1000

IIP8coreindustries
WithinIIP,following8arecoreindustriesbecausetheyveimpactonalmostallother
economicactivities:
Coal,fertilizer,electricity,crudeoil,naturalgas,refineryproducts,steel,andcement.

IIPDeflation
IIPisaquantitativeindex,theproductionsofitemsarebeingexpressedinphysicalterms.
Butforsomeitems,theinformationisreceivedinValuetermratherthanquantityor
volume.
So,CSOusesWPIasadeflatortoconvertthatpriceintovolume.

[Act4]WHYREVISEWPI,CPI,IIP
series?
NowtimeforaFLASHBACKinthismovie
index newserieseffectivefrom
CPI

2011,January

WPI

2010,September

IIP

2011,June

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

11/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Soifthesearethenewserieswetalkedaboutthenwhatwasthesystembeforethat?

RevisionofWholesalePriceIndex(WPI)
TheWPIserieshastoberevisedoften,becauseoftworeasons:
#1:baseyear
Inflationisarelativeconcept.Whenwesaythereisinflationitmeansthingsusedtobe
cheaperatsomepreviousyear.
So,tocalculateWPI,weneedabaseyear.Baseyearshouldberevisedonceinawhile.
#2:productmix
WPIcalculatesinflationusingLaspeyresformulaforweightedarithmeticmean.
Butthisformulafailstocapturethedynamicchangesinproductmixandstructureofthe
economyovertime.
Forexample,15yearsago,priceofVCRandmagnetictapecassetteswouldhavemattered.
Butnooneusesthemanymore.
Sameway,15yearsago,peopledidnotbuythatmuchmoisturizercreamsandperfumes.
Hencewevetokeepchangingthecomponents.
BasedAbhijitSenCommittee
BEFORE

AFTERSenCommittee,WPIreform
NewsystemStartedfrom2010,Sep

Baseyear1993 2004
435items

676

Increasedno.ofpricequotations

Iffactorydirectlyexports,thendontcountthatvalueinWPI
Iffactorydirectlyimportsanitem,dontcountitinWPI.
Addednewitems.

WPI:Newitemsadded:
Listnotexhaustive
Primaryarticles
Lemon,GaurSeed,Rose,Jasmine,Marigold
Crudepetroleum,CopperOre,ZincConcentrate
Manufactureditems
ComputerStationery,UPS,SMPS,VCDplayer
DishAntenna,FibreOpticCable
Perfume,ScentCream,Moisturizer,BodyPowder
LeatherGloves,jackets,garments,bags
http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

12/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Football,Toothbrush

SaumitraChaudhuriCommitteeonWPI
CurrentWPI
676items

Saumitrarecommends
~1200items.

11vegetables 17

Expectedtobeoperationalfromnextyear

Collectpricesfrommorecentres,togetbetterestimate.

Reduceweightofprimaryfooditems.Increaseweightofmfg.items

Baseyear2004 2009,Andthento2011
EnoughofWPI,movingon

RevisionofConsumerpriceindexseries(CPI)
PROLEMBefore

SOLUTIONAfter

Startedfrom2011,January

baseyear2010

Specificgroupsonly.
(Baseyearinbracket)
Industrialworkers(2001) Rural
agriculturallaborers

Urban

(1986)

combined(+state/UTwiseseparatelyreleased)

rurallaborers(1986)

ConsumerFoodPriceIndices(CFPI).

Problem=doesntgive
wholepicture
ItemlistdesignedbasedonNSSOs2004survey.Infuture,CPI
willberevisedusingNSSOs2011survey.
Mindit:thisdoesntmeantheynolongercalculateCPIforindustrialworkersAgro&rural
laborers.Theystilldoit.

RevisionofIndustrialIndexproduction(IIP)
EachIIPitemshouldhavecertainminimumcontributiontonationalproduction.
ForexampleVCRindustryscontributioninTodayseconomy=0%
Therefore,needtoupdatelistwithbasedontechnologicalchanges,economicreformsand
consumptionpatternsofthepeople.
IIPBefore

IIPAfter
C.P.ChandrasekharCommittee

Baseyear:
1993

2004

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

13/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Addednewitems:Apparels,GemsandJewellery,Newspapers,pasteurisedMilk,
Writing&PrintingPaper,AyurvedicMedicaments,WoollenCarpets,Wood
Furniture,TerryTowel,CoirMats&Mattings,PolytheneBags,InstantFood
Mixes,FruitPulpetc.
Information
source
agencies:
15

16.
MSMEdroppedasasourceagency.
ChemicalandFertilizerDepartmentadded
So+2minus1=1increase

NIC1987

ItemsusedfromNationalIndustrialClassification(NIC)2004
Increasedweightgiventominingandelectricity

Decreasedtheweightgiventomanufacturing
AskedMSMEministrytodevelopaseparateindexforMSMEsector

Comparison:WPI,CPI,IIP

Whatdidwelearnsofar?

QUESTION

WPI

CPI

IIP

HOW?

Lespeyresformula

same

same

WHO?

Economicadvisor

CSO

CSO

WHEN?

weekly&monthly

monthly

monthly

WHEREtheyget

ministries,dept.,

NSSOandPostal

data?

industries

workers

Components
types

3:MFG>Primary>
Fuel
onlyoneWPI

5categories

3:MFG>Mining>electricity

Rural,urban,

SectorwiseandgoodsUsage

combined

wise.

items

676

baseyear

2004

2010

nonfood

headline

manufacturing

(food+fuel)

CORE

ministries,dept,bodies

682
2004
8industries

[Act5]WHYWPI,CPI,IIPimportant?
Yes,whybothercalculatingWPI,CPIandIIPinthefirstplace!?

WhyisWPIimportant?
Monitorsthedynamicmovementofprices.
Who

WhytheyuseWPI?

Government Todesigntrade,fiscalandothereconomicpolicies
Todesignmonetarypolicy,underMultipleindicatormethod:RBIusedWPI.
RBI

(ButRajanstartedusingCPIforthispurpose,sinceApril2014,onUrjitpatel

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

14/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

recommendation.
Businessmen

Inthebusinesscontracttocalculatepriceescalationclausesinthesupplyof
rawmaterials,machineryandconstructionwork.

WhyCPIimportant?
Measuresthepriceofgoodsthathouseholdsconsume.
Monitoringpricestability.
Government CalculatingDearnessAllowance
UsingasDEFLATORinnationalaccounting
TodesignmonetarypolicyfromApril2014onwards,basedonUrjitPatel

RBI

recommendation.

Businessmen CalculatingDearnessAllowance

WhyIIPimportant?
TheIIPmeasuresvolumechangesintheproductionofaneconomy
Providesameasurementthatisfreeofinfluencesofpricechanges
DatausedinGovernmentpolicyplanningpurposes,IndustrialAssociations,Research
InstitutesandAcademicians.

[Act6]Otherindexes

Serviceperformanceindices(SPI)
Index Doesitcoverservicesectorinflation?
WPI

Nope

CPI

Partiallye.g.education,healthcare

IIP

Itdoesntcaptureinflation.Itcapturesincrease/decreaseinproduction.
Butheretoo,Servicesectorproductionnotcounted.

Anyways,EconomicAdvisorstartedservicespriceindices(SPI).(recallhealsodoestheWPI).
Onexperimentalbasis.
Tocaptureinflationinfollowingservicesectors:
Railways
SPIs
Banking
SPIs

freightandpassengerservices
servicesforwhichbankschargefees,commissions,brokerage,etc.
RBIgetsthemdatafrom21banks(13sarkaari,4private,2foreign,1
cooperativeand1RRB).
onlyDepartmentofPosts.
Hardlytellsanything,becauseitIGNORESfollowing:

PostalSPIs Privatecouriercompanies
postalservicetoarmedforces(fornationalsecurityissue)
moneytransferviaWesternunion,IPO,moneyorderrevenuestamps.
Telecom

onlyforcellularservicesonthebasisTRAIreport.Quarterlybasis.

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

15/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

SPIs
AllofthemusesameLaspeyresformula.

BalticDryindex
LondonbasedBalticExchange,releasesthisindexnumberondailybasis.
Measurescosttotransportrawmaterialsbysea.
IfBaltic

meaning

number
Increases

Morerawmaterialshipped.Worldeconomygrowing
WashighestinMay2008(~11,800).
Reverseimpactoneconomy.

Decreases

After2008,Afterthatcontinuousdeclineduetosubprime,andeurozone
crisis.
LowestMay2014(982)

ProducerPriceIndex(PPI)
measurespricechangefromtheperspectiveoftheseller.
i.e.averagechangeinsellingpricesreceivedbydomesticproducersfortheiroutput.
Coversbothgoods+services.(WPIonlycoversgoods)
Sellersandpurchaserspricesdifferduetogovernmentsubsidies,taxesanddistribution
costs.Therefore,bettertousePPI.BcozCPIdoesntcoverthis.
MajorityoftheOECDcountriesmeasureinflationbasedonProducerPriceIndex(PPI)
WPIhasbeenreplacedinmostcountriesbyProducerPriceIndex(PPI)duetothebroader
coverageprovidedbythePPIintermsofproductsandindustries
PPIhasmoreconcordancewithsystemthenationalaccount.(comparedtoWPI)
Therefore,OfficeoftheEconomicAdviser(OEA)hastakenuptheinitiativeforconstructinga
ProducerPriceIndex(PPI)forIndia.
Somenotablecountries
IrelandusesBOTHWPIandPPI
OnlyWPI

OnlyPPI

Japan,Australia,Greece,Norwayand

Canada,USA,Aussies,S.Korea,UK,Spain,

Turkey

Italy

Somemoreindexes
RBI

Inflationexpectationsurveyofhouseholds.
Forthreemonthsand1yearaheadperiods.
OrderBooks,InventoriesandCapacityUtilizationSurvey(OBICUS)
ByReserveBankofIndia(RBI)

OBICUS

Toassessconsumptionandinvestmentdemand
Surveying~2500companiesinmanufacturingsector

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

16/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Timeframe:quarterly
AnnualsurveyofIndustries
ByNSSOunderStatisticalministry
ASI

Tosurveymanufacturingsectorsgrowthandstructure
Surveyingeverymfg.unitemploying10workersormore.
Annually

HSBC
NEER|REER

IndiaManufacturingPurchaseManagersIndices(PMI).
Monthlybasis
willseethemwhenIpublisharticlesforch6and8.inthemeantimeyoumay
refertothepowerpointorlecturevideos..

[Act7]Laspeyresformula

Notforprelims.ButwhentheywanttobeginSTRESSinterviewparticularlyduring
bank/MBA.
LaspeyrewasaGermaneconomist.
HisformulausedincalculationofWPI,CPI,IIP,servicepriceindices.
ItisaWeightedarithmeticmean.
Letsunderstandwithacrudeexample.
SupposealocalthugsINFLATIONindexusesfollowingformat,with2004asbaseyear.
Hecanonlydecidethebaseyearandweightsassignedtoeachcomponentsonhisown.
Condition:heshoulddistributetheweightinsuchmannerthattotalweightis10,100,1000
thatway%calculationiseasier.
Afterthat,monetarypolicies,fiscalpoliciesandmarketforceswilldeterminethepricesin
baseyearandcurrentyear.Hejusthastoapplyformula.
So,exceldatalookslikethis:
Components weight 2004prices 2014prices
Desiliquor

10

Rs.10

Rs.15

Gutkha

20

Rs.2

Rs.5

Cinema

70

Rs.50

Rs.75

Weight

100

First,Illfindrelativeprice(CurrentpricesdividedbyBASEyearsprices)
Components weight 2004prices 2014prices R
Desiliquor

10

Rs.10

Rs.15

1.5

Gutkha

20

Rs.2

Rs.5

2.5

Cinema

70

Rs.50

Rs.75

1.5

NowIllmultiplyRelativepricewithweightassignedtoeachcomponents
http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

17/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Components weight 2004prices 2014prices R RxW

Desiliquor

10

Rs.10

Rs.15

1.5 15

Gutkha

20

Rs.2

Rs.5

2.5 50

Cinema

70

Rs.50

Rs.75

1.5 105

Total

100

170

Finally,theadditionofRXWwillmeindexnumberforcurrentyear.15+50+105=170.
ThatmeansCurrentinflationin2014,is70%,comparedtothepricesinbaseyear2004.
In2015,IfIgetthenumber180=80%inflationthanbaseyear(2004)
Butcomparedto2014,the2015syearoninflationwouldbe(180170)/170=~6%.
Statisticallywecanexpresswiththisformula:

Note:somebooksuseP0/Q0,itsbasicallythesame.Becausetheytakeweightas=(pxq).
Someotherindexes(onlyGIST,notgoingindetails)
Paasche
index

TellsuswhattodaysBasketofcommodities,wouldhavecost@yesterdaysprice.

Fisher

Geometricmeanof(LaspeyreseandPassche).Thissolvetheproblemof

index

substitutionbiasinconsumerExpenditure.

ArticleprintedfromMrunal:http://mrunal.org
http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

18/19

03/05/2016

MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

URLtoarticle:http://mrunal.org/2014/08/explainedwpicpiiipindexcomponent
coreinflationheadlineinflationlaspeyre.html
Copyright2014Mrunal.Allrightsreserved.

http://mrunal.org/2014/08/explainedwpicpiiipindexcomponentcoreinflationheadlineinflationlaspeyre.html/print/

19/19