analysis of indian inflation rate based on statistical tools

8/13/2019 analysis of Indian inflation rate based on statistical tools

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Table of contents

Abstract ......................................................................................................................................................... 2

1. Introduction ............................................................................................................................................... 3

1.1. Inflation Measurement method in India........................................................................................ 3

1.2. Consumer price index (CPI) ......................................................................................................... 3

1.3. Wholesale price index (WPI) ........................................................................................................ 4

1.4. Inflation rate calculation in India based on WPI........................................................................... 5

2. Inflation based on wholesale price index .................................................................................................. 6

2.1. WPI of All commodities .................................................................................................................... 6

2.2. WPI of primary articles ...................................................................................................................... 7

2.3. WPI of food articles ........................................................................................................................... 8

2.3. WPI of non-food articles .................................................................................................................... 9

2.4. WPI of fuel and power ..................................................................................................................... 10

2.5. WPI of manufactured products ........................................................................................................ 11

3. Inflation based on consumer price index ................................................................................................ 12

3.1. CPI combined................................................................................................................................... 12

3.2. CPI rural ........................................................................................................................................... 13

3.3. CPI urban ......................................................................................................................................... 14

4. Inflation rate based on WPI for 2012-13 ................................................................................................ 15

5. Inflation rate based on CPI for 2012-13.................................................................................................. 15

6. Conclusion .............................................................................................................................................. 15


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Abstract

Analysis on Indian inflation rate based on whole sale price index (WPI) and consumer

price index (CPI). We were collected data from 2004-2005 financial year to 2013-2014(up to

July) financial year for WPI and 2010-11(starting from January) financial year to 2013-14 (up to

July) financial year for CPI. Inflation rate has been calculated based on both WPI and CPI and

seen the effects of seasonal indices and estimated the trend line by using available statistical tolls

in Microsoft excel.


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1. Introduction

Prices move along with the fluctuations in business activities. These movements are

termed as inflation and also disinflation, deflation, reflation. Inflation is a persistent and

substantial rise in the general level of prices. The prices of different commodities may vary at

different rates and in different directions. Some may increase, whereas the others may decline.

However, such price changes cannot be termed as inflation. Similarly, a onetime increase in

general price level is not considered as inflation. A onetime increase in price level and contrasts

it with a continuous increase in the price level is termed as inflation. Inflation results in a fall in

the money i.e., the exchange value of money declines.

1.1.Inflation Measurement method in India

Many developing countries use changes in theConsumer Price Index (CPI) as their

central measure of inflation. However, this method is unsuitable for use in India, for structural

and demographic reasons. CPI numbers are typically measured monthly, and with a significant

lag, making them unsuitable for policy use. Instead, India uses changes in theWholesale Price

Index (WPI) to measure its rate of inflation.

The WPI measures the price of a representative basket of wholesale goods. In India, this

basket is composed of three groups: Primary Articles (20.1% of total weight), Fuel and Power

(14.9%) and Manufactured Products (65%). Food Articles from the Primary Articles Group

account for 14.3% of the total weight. The most important components of the Manufactured

Products Group are Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal

Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport,

Equipment and Parts (5.2%).

WPI numbers are typically measured weekly by the Ministry of Commerce and Industry.

This makes it more timely than the lagging and infrequent CPI statistic.

1.2.Consumer price index (CPI)

CPI is a current socio-economic indicator that needs to be constructed to measure the

changes over time in the general level of prices of consumption goods and services that the

reference population acquire, use or pay for consumption and to provide one of the basic

parameters needed for economic planning and policy formulations by Government as well as

private organizations. And to adjust the taxes, fines or fees levied by Government so as to

maintain the burden upon the people paying taxes, fines, etc. constant in real terms and for

obtaining constant-price estimates of consumption expenditure for national accounting and for

indexation of wages and salaries in contracts of employment. This presumably avoids the need to

renegotiate the contracts when prices rise and for indexation of prices in contracts for the supply

of goods and services by firms. The new CPI series followed in India is CPI rural, CPI urban and

CPI combined.
http://en.wikipedia.org/wiki/Consumer_Price_Indexhttp://en.wikipedia.org/wiki/Wholesale_Price_Indexhttp://en.wikipedia.org/wiki/Wholesale_Price_Indexhttp://en.wikipedia.org/wiki/Wholesale_Price_Indexhttp://en.wikipedia.org/wiki/Wholesale_Price_Indexhttp://en.wikipedia.org/wiki/Consumer_Price_Index


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The common formula for the Consumer Price Index as defined would be

Total cost of a fixed basket of goodsin the current period

---------------------------------------------------------------- X 100

Total cost of the same basket in the base period

1.3.Wholesale price index (WPI)

Wholesale price index measures the movement in the wholesale prices, i.e., the process

charged by wholesalers once these have crossed the production stage, reflecting the second

commercial transactions. Beside the prices of raw materials, semi-finished and final goods, the

prices of imported tangible goods are also considered in the wholesale price index if they are

transacted at the wholesale level. However, it excludes the prices of exported commodities.in

many countries PPI is treated as WPI.

WPI of the new series [with base year 2004- 05] was launched on 14th September, 2010.

A representative commodity basket comprising 676 items. Those are mainly divided into

primary article, food articles, non-food articles, fuel and power and manufactured goods.

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To

show the calculation, lets assume the base year to be 1970. The data of wholesale prices of all

the 435 commodities in the base year and the time for which WPI is to be calculated is gathered.

Lets calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that

the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

The WPI of wheat for the year 1980 is,

(Price of Wheat in 1980Price of Wheat in 1970)/ Price of Wheat in 1970 x 100

i.e. (6.105.75)/5.75 x 100 = 6.09

Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09.

In this way individual WPI values for the remaining 675 commodities are calculated and

then the weighted average of individual WPI figures are found out to arrive at the overall

Wholesale Price Index. Commodities are given weight-age depending upon its influence in the

economy.


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1.4.Inflation rate calculation in India based on WPI

If we have the WPI values of two time zones, say, beginning and end of year, the

inflation rate for the year will be,

(WPI of end of yearWPI of beginning of year)/WPI of beginning of year x 100

For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation

rate for the year 1981 is,

(109.72 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is

3.42%.

Since WPI figures are available every week, inflation for a particular week (which

usually means inflation for a period of one year ended on the given week) is calculated based on

the above method using WPI of the given week and WPI of the week one year before. This is

how we get weekly inflation rates in India.


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2. Inflation based on wholesale price index

2.1. WPI of All commodities

Descriptive statistics for the year 2012-13 of WPI of all commodities are

Average WPI of all commodities is 167.61. Fifty percentage of WPI of all commodities values lies above 168.65 and other fifty

percent values lies below.

The dispersion exists from the mean value is 2.55. Highest WPI value is 170.9. Lowest WPI value is 163.5.

Simple regression equation of WPI of all commodities from financial year 2010-11 to financial

year 2013-14 (up to July)

The regression equation representing month and inflation rate is y = -0.1203x + 10.735i.e., Inflation rate = -0.1203*(month) + 10.735.

For a unit change in month, the inflation rate is decreased by 0.1203. By using the equation we can project the values for inflation rate using month.

Trend line for month and inflation rate of WPI of all commodities from financial year 2010-11 to

financial year 2013-14 (up to July)

Figure 1: trend line for WPI of all commodities

y = -0.1203x + 10.735

R = 0.7558

0

2

4

6

8

10

12

0 10 20 30 40 50

trendline

inflation rate

Linear (inflation rate)


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2.2. WPI of primary articles

Descriptive statistics for the year 2012-13 of WPI of primary articles are

Average WPI of primary articles is 219.96

Fifty percent of WPI lies above 220.5 and other fifty percent lies below

The dispersion exists from the mean value is 3.29 Highest WPI value is 224.4 Lowest WPI value is 215

Simple regression equation of WPI of primary articles from financial year 2010-11 to financial


The regression equation representing month and inflation rate is y = -0.3262x + 18.665i.e., Inflation rate = -0.3262*(month) + 18.665

For a unit change in month, the inflation rate is decreased by 0.3262 By using the equation we can project the values for inflation rate using month

Trend line for month and inflation rate of WPI of primary articles from financial year 2010-11 to


Figure 2: trend line for WPI of primary articles

y = -7E-05x4+ 0.0055x3- 0.1258x2+

0.3593x + 19.903

R = 0.8049

0

5

10

15

20

25

0 10 20 30 40 50

trend line

inflation

Poly. (inflation)


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2.3. WPI of food articles

Descriptive statistics for the year 2012-13 of WPI of food articles are

Average WPI of food articles is 211.85


The dispersion exists from the mean value is 2.91 Highest WPI value is 215.4 Lowest WPI value is 206.1

Simple regression equation of WPI of food articles from financial year 2010-11 to financial year

2013-14 (up to July)

The regression equation representing month and inflation rate is y = -0.22227x + 15.391i.e., Inflation rate = -0.22227*(month) + 15.391


Trend line for month and inflation rate of WPI of food articles from financial year 2010-11 to


Figure 2: trend line for WPI of food articles

y = -3E-05x4+ 0.0021x3- 0.0094x2-

1.1575x + 22.836

R = 0.6938

-5

0

5

10

15

20

25

0 10 20 30 40 50

trend line

inflation

Poly. (inflation)


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2.3. WPI of non-food articles

Descriptive statistics for the year 2012-13 of WPI of non-food articles are

Average WPI of non-food articles is 201.92



Simple regression equation of WPI of non-food articles from financial year 2010-11 to financial


The regression equation representing month and inflation rate is = -0.4368x + 22.541 i.e.,Inflation rate = -0.4368*(month) + 22.541


Trend line for month and inflation rate of WPI of non-food articles from financial year 2010-11

to financial year 2013-14 (up to July)

Figure 3: trend line for CPI of non-food articles

y = -0.0003x4+ 0.0308x3- 0.8956x2+

8.8063x - 0.4479

R = 0.6984

-50

5

10

15

20

25

30

35

40

0 10 20 30 40 50

trend line

inflation

Poly. (inflation)


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2.4. WPI of fuel and power

Descriptive statistics for the year 2012-13 of WPI of fuel and power are

Average WPI of fuel and power is 186.41



Simple regression equation of WPI of fuel and power from financial year 2010-11 to financial




Trend line for month and inflation rate of WPI of fuel and power from financial year 2010-11 to


Figure 4: trend line for WPI of fuel and power

y = 9E-05x4- 0.0075x3+ 0.2007x2-1.8586x + 16.865

R = 0.6917

0

2

4

6

8

10

12

14

16

18

0 10 20 30 40 50

trend line

inflation

Poly. (inflation)


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2.5. WPI of manufactured products

Descriptive statistics for the year 2012-13 of WPI of manufactured products are

Average WPI of manufactured products is 147.05



Simple regression equation of WPI of manufactured products from financial year 2010-11 to




Trend line for month and inflation rate of WPI of manufactured products from financial year

2010-11 to financial year 2013-14 (up to July)

Figure 5: trend line for WPI of manufactured products

y = 2E-05x4- 0.002x3+ 0.0489x2-0.3011x + 6.0679

R = 0.7215

0

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2

3

4

5

6

7

8

9

0 10 20 30 40 50

trend line

inflation

Poly. (inflation)


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3. Inflation based on consumer price index

3.1. CPI combined

Descriptive statistics for the year 2012-13 of CPI combined are

Average CPI of combined is 123.33 Fifty percent of CPI lies above 124.45 and other fifty percent lies below The dispersion exists from the mean value is 3.51 Highest CPI value is 127.5 Lowest CPI value is 117.1

Simple regression equation of CPI combined from financial year 2010-11 (from January) to


The regression equation representing month and inflation rate is = 0.0517x + 9.2961 i.e.,Inflation rate = 0.0517*(month) + 9.2961

For a unit change in month, the inflation rate is increased by 0.0517 By using the equation we can project the values for inflation rate using month

Trend line for month and inflation rate of CPI combined from financial year 2010-11(from

January) to financial year 2013-14 (up to July)

Figure 6: trend line for CPI combined

y = -0.0004x4+ 0.0158x3- 0.2442x2+

1.5966x + 6.4059R = 0.6867

0

2

4

6

8

10

12

0 5 10 15 20

trend line

inflation

Poly. (inflation)


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3.2. CPI rural

Descriptive statistics for the year 2012-13 of CPI rural are

Average CPI of rural is 124.5

Fifty percent of CPI lies above 126.1 and other fifty percent lies below

The dispersion exists from the mean value is 3.62 Highest CPI value is 128.3 Lowest CPI value is 117.9

Simple regression equation of CPI rural from financial year 2010-11 (from January) to financial




Trend line for month and inflation rate of CPI rural from financial year 2010-11(from January) to


Figure 7: trend line for CPI rural

y = -0.0002x4+ 0.0065x3- 0.1094x2+0.9574x + 6.7263

R = 0.77190

2

4

6

8

10

12

0 5 10 15 20

trend line

inflation

Poly. (inflation)


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3.3. CPI urban

Descriptive statistics for the year 2012-13 of CPI urban are

Average CPI of urban is 121.81

Fifty percent of CPI lies above 122.25 and other fifty percent lies below The dispersion exists from the mean value is 3.37 Highest CPI value is 126.5 Lowest CPI value is 116.1

Simple regression equation of CPI urban from financial year 2010-11 (from January) to financial




Trend line for month and inflation rate of CPI urban from financial year 2010-11(from January)

to financial year 2013-14 (up to July)

Figure 8: trend line for CPI urban

y = -0.0006x4+ 0.0251x3- 0.3724x2+

2.1115x + 6.7441

R = 0.5319

0

2

4

6

8

10

12

14

0 5 10 15 20

trend line

inflation

Poly. (inflation)


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4. Inflation rate based on WPI for 2012-13

Inflation rate of all commodities is 7.35

Inflation rate of primary articles is 9.80

Inflation rate of food articles is 9.90 Inflation rate of non-food articles is 10.52 Inflation rate of fuel & power is 10.33 Inflation rate of manufactured goods is 5.411

5. Inflation rate based on CPI for 2012-13

Inflation rate for CPI combined is 10.56 Inflation rate of CPI rural is 10.74 Inflation rate of CPI urban is 10.41

6. Conclusion

In India for the purpose of calculation of inflation rate, government or central authority

uses changes in the wholesale price index (WPI) to measure its rate of inflation. However

consumer price index (CPI) is unsuitable for use in India for structural and demographic reasons.

So concerning the previous few years WPI data and estimated the inflation and it is mostly

effected by non-food articles followed by fuel & power while concerning CPI data. Inflation

effect is high in CPI rural.


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7. References

Handbook of Statistics on Indian Economy in reserve bank of India:http://www.rbi.org.in

Inflation rate calculation in India based on WPI inhttp://www.marketcalls.in Veena Keshav Pailwar: Economic Environment of Business, (2012), (Prentice Hall

India).

http://www.imf.org/external/index.htm http://worldbank.org/
http://www.rbi.org.in/http://www.rbi.org.in/http://www.marketcalls.in/http://www.marketcalls.in/http://www.marketcalls.in/http://www.imf.org/external/index.htmhttp://worldbank.org/http://worldbank.org/http://www.imf.org/external/index.htmhttp://www.marketcalls.in/http://www.rbi.org.in/


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analysis of indian inflation rate based on statistical tools

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