Macroeconomics Case Study

Inflation Measure: CPI or WPI?

OR

Abstract: Inflation has been a nagging problem plaguing the economies across the world at various times. As negative effects of inflation are enormous, adoption of various anti-inflationary policies becomes inevitable. Inflation targeting and its measurement have become the prerequisites in the macroeconomic policy matrix of the economies. Inflation being a significant economic concept affecting decision-making in business firms or other management units, there is an attempt to resolve the dilemma whether Consumer Price Index (CPI) is to be adopted or Wholesale Price Index (WPI) as a measure of Inflation. Though most of the major economies of the world have opted for CPI, WPI has its own merits too. As CPI and WPI differ conceptually in terms of their purpose and use, commodity coverage, weights, associated markets and the base year, both often show difference in direction and magnitude. Consequently, the choice continues to be difficult, if not arbitrary.

Pedagogical Objectives:

• To know the brief history of inflation around the world
• To understand the various types of inflation (Demand-pull vs Cost-push)
• To understand the various measures of inflation (CPI vs WPI)
• To elucidate the effects of inflation and appreciate the significance of inflation from managerial perspective and evaluate its desirability
• To understand the role of anti-inflationary policy in containing inflation.

Keywords : Bank of England, Inflation, Monetary Policy and Central Banks, Inflation Targeting, Consumer Price Index, Price Stability, Trend Inflation, Operational Independence of a Central Bank, Aggregate Price Index, Monetary Targeting, Exchange Rate Targeting