Inflation Indices

We all have seen the recent headlines relating to inflation in Pakistan that our Consumer Price Index (CPI) based inflation increased to 9% annually. However, CPI is not the only inflation index; there are other indices through which inflation is measured. Let’s see what these indices are and when they are used.

Consumer Price Index (CPI)

CPI is the most commonly used inflation index. It reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. Essentially it attempts to quantify the aggregate price level in an economy and thus measure the purchasing power of a country’s currency unit. CPI is calculated considering the retail prices of the goods and services.

Wholesale Price Index (WPI) :

WPI is similar to CPI except that it measures the price change of basket goods and services at the producer or wholesale level. WPI is usually estimated to know the economy’s demand and supply condition of goods and services.

Producer Price Index (PPI) :

The Producer Price Index is a family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser’s perspective.

Relationship between CPI and PPI

The main difference between CPI and PPI is the targeted goods and services. The scope of CPI is limited and restricted to the basket of goods and services, whereas PPI takes the whole output of the country. The second main difference is the price. In PPI, the taxes are excluded from the cost as the taxes do not directly impact the producer. However, taxes are included in CPI as these directly impact the consumers.