By Netra Mittal
Inflation had soared to a four-month high of 3.24 percent in August 2017, but a recent report shows that Wholesale Price Index (WPI) inflation has eased to 2.6 percent, as of September 2017. It is expected that the inflation level will be an average of 2.8 percent in the year 2017-18. This can be attributed to the fall in vegetable prices, and favourable base effects. A base effect refers to inflation in the current year, compared to that of a previous year. An example would be: if the Price Index goes from 100 to 150, and then to 200. The initial increase of 50, gives the percentage increase as 50% (taking the base of 100) but the subsequent increase of 50 gives the percentage increase as 33.33% (taking the base of 150). This is the base effect. Currently, the base year has been revised to 2011-12.
Along with the Consumer Price Index (CPI), the Wholesale Price Index is a primary measure of inflation in many countries. In India, the Reserve Bank of India (RBI) uses it to review and make monetary policy decisions. It is an index used to measure and track changes in the price level of goods at the wholesale level, or for bulk sale between organizations. It is measured in order to keep a track of demand and supply in the economy. Though expected given the circumstance, the RBI had not cut rates in its policy review earlier this month even as inflation remained low and GDP growth declined. Core inflation is said to have risen to a 35-month high 2.8% in September from 2.6% in August.
Importance of WPI
The WPI provides an estimate of inflation at the wholesale level for the entire economy. This helps in timely intervention done by the government and the RBI, to keep a check on inflation, especially where essential commodities are concerned, before the prices rise at the retail level. Therefore, a drop in the average is good news as it promotes low inflation rates, and encourages consumers to buy more goods and services. While inflation is expected to come up towards the end of the year as the favourable base effect begins to ease, WPI numbers will have a consequent downward impact on CPI, which may allow RBI to induce the demand by reducing interest rates.
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