Competitive Exams: Current Affairs 2012: Producer Price Index

  • The Reserve Bank of India (RBI) has proposed a Producer Price Index (PPI), which would measure the average change over time in the sale prices of domestic goods and services.

  • In its present structure, the Wholesale Price Index (WPI) does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes. For example, the index captured the price of important commodities such as milk from the retail markets; not at the producer level.

  • In contrast to Consumer Price Index (CPI), PPI measures price changes from the perspective of the seller. Sellers ‘and purchasers’ prices differ due to government subsidies, sales and excise taxes, and distribution costs. For these reasons, it is, therefore, desirable that we move towards PPI.

  • Theoretically, CPI, which measures changes over time of the general level of prices of goods and services that households acquire for the purpose of consumption, is considered a better measure of inflation than WPI.

  • But, the new comprehensive CPI did not have adequate history to support data analysis and to be used as a sole headline measure of inflation.

  • The structural changes in our economy over the past decade have created an unprecedented demand for commodities. In the absence of a supply response, this has resulted in a lasting change in the price level. Therefore, headline measure of inflation will necessarily have a larger momentum than core inflation.

  • Core inflation was usually estimated by excluding food and energy prices from the basket of goods and services that represents a household's typical spending.

  • In an economy like India where food constitutes nearly 50 per cent of the consumption basket and fuel has a weight of 15 per cent, can a measure of inflation that excludes them be called core? Inflation in fuel and certain protein food items has been persistent over the last three years. Can a persistent component be excluded from the core measure?

Courtesy: The Hindu