Retail inflation spiked to nearly 7% in July, impacting household spending. But even with the buzz around the figure, do you know how inflation is tracked and calculated? Here’s how the figures are arrived at, the indices used to measure inflation, and what they mean.
CPI inflation: Data published by the National Statistical Office last week showed that retail inflation rose to 6.93% in July from 6.23% in June, with food inflation rising to 9.62% from 8.72%. Inflation is the rise in prices of goods and services. 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 is the Consumer Price Index or CPI.
The index assigns different weights to various goods and services and tracks the movement of their prices. It also tracks prices 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 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, healthcare and transportation, where inflation levels are much higher," he said.
WPI inflation: The other index measures inflation is the Wholesale Price Index (WPI). While retail inflation looks at the price at which the consumer buys products, WPI is measured based on prices at the wholesale level.
“There are two layers between the wholesale price and the retail price. One is the transportation cost and the second is the retail mark-up. During the lockdown it was difficult to transport goods, and that additional cost got added to individual prices," said Hajra. Also, if there is scarcity, the retail margin goes up.
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. “The pricing norms of wholesale and retail are different. Certain items on WPI such as fuel are also closely linked to global prices, creating a gap between the figures on this index and CPI," said Hajra.
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
