Producer Price Index

Articles

On the occasion of 6th annual Statistics Day on July 17th, 2012, the Governor of Reserve Bank of India D. Subbarao proposed a Producer Price Index (PPI) which would be useful in measuring the average change over time in the sale price of domestic good and services.

Why the need of a third index? A comparison between WPI, CPI & PPI

In its present structure, the Wholesale Price Index (WPI) does not capture the price movement of services, for example the WPI captures the price of important commodities from the retail market and at the producer level.

And as far as the Consumer Price Index (CPI) in concerned, though it is considered a better measure of inflation than WPI but at the same time CPI does not have adequate history of supporting data analysis, because it only measures the changes in prices paid by the consumer at the retail level only, hence it also can't be used alone as an inflationary measure.

While contrary to the CPI, PPI measures price changes from the perspective of the seller. Since seller & buyers prices differ due to government subsidies, taxes and distribution cost. Therefore it is highly desirable to adopt Producer Price Index (PPI) methodology for inflationary measurement.

Wholesale Price Index (WPI): It measures the change in price of a selection of goods at wholesale, prior to retail sales & excluding sales taxes. It is a bit similar to Producer Price Index.

Consumer Price Index (CPI): It measures the change in prices paid by the consumer at the retail level. It can be for the whole community or group specific. e.g. - CPI for industrial workers etc.

Producer Price Index (PPI): It measures the change in the prices received by a producer. Its difference with the WPI is accounted by logistics, profits & taxes mainly. It also measures the price pressure due to increase in the cost of raw material. In general terms, it means prices of goods as they are sold by the producers to the wholesalers.

Inflation

Inflation is defined as the persistent rise in the price of goods & services. It reduces saving and the purchase power of money. It also leads to depreciation of currency & makes imports costlier.

Importance from examination point of view:

Definition: Short Notes - WPI, CPI, PPI
Difference between WPI & CPI, CPI & PPI, WPI & PPI.
Compare & contrast the recently proposed Producer Price Index with that of WPI & CPI.

Back to All Articles