How is inflation calculated?

"Inflation is taxation without legislation." Milton Friedman.

India uses the Wholesale Price Index to calculate and then decide the inflation rate in the economy. Most developed countries use the Consumer Price Index to calculate inflation. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.

In India, data on a total of 435 commodities' prices is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.

CPI is a measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.CPI is a fixed quantity price index and considered by some a cost of living index.

Many economists say that India must adopt CPI to calculate inflation as CPI measures the increase in price that a consumer will ultimately have to pay for. United States, the United Kingdom, Japan, France, Canada, Singapore and China use CPI to measure inflation.

WPI does not measure the exact price rise consumers will experience because, it is calculated at the wholesale level.

Another issue with WPI is that more than 100 out of the 435 commodities included in the Index are no longer important for consumers. Even commodities like livestock feed are considered to measure the WPI. In India, inflation is calculated on a weekly basis.