Topic 3
Tracking the Cost of Living
Karlan and Morduch, Chapter 8
Cost of living
• Cost of living: the cost of buying different goods and
services
• Varies from person to person and place to place
depending on what are bought and what the prices
are
• Changes in cost of living crucially depends on the rate
of inflation
• If prices increase more than the money income, real
income, i.e., the goods and services money income
can buy falls
Inflation
• Process of overall price rise
• Thousands of goods and services and not all of
these relevant for all
• Overall price rise: GDP deflator
– Ratio of Nominal GDP/Real GDP
– Slow process of reporting
• More common: use of price indexes
– Consumer price index
– Wholesale price Index
– Producer price Index
3
Differences between Price Indexes
• Base year
• Selected products with assigned weights
• Type of prices
• Frequency of data
4
Price Indexes used in India Base Compiled by
year
Wholesale Price Index (WPI) 2011-12 Office of the Economic
Adviser, Ministry of
Commerce and industry
Consumer Price Index for Industrial 2016 Labour Bureau, Ministry of
Workers (CPI-IW) Labour and Employment
Consumer Price Index for Agricultural 1986-87 Labour Bureau, Ministry of
Labourers (CPI-AL) Labour and Employment
Consumer Price Index for Rural 1986-87 Labour Bureau, Ministry of
Labourers (CPI-RL) Labour and Employment
Consumer Price Index for Urban, Rural 2012 Central Statistical Office
and Combined
5
In India
• Earlier WPI more common than CPI:
– Timely availability
– More detailed
– National coverage, though Services not
included
– No harmonized CPI
• Several CPI for different segment
• Now representative CPI for the country as a
whole started with CPI (Urban) and CPI (Rural)
6
Price Index
• Base year WPI (2011-12 = 100); CPI (2012 = 100)
• Selected products /services with assigned weights
– WPI: consumer, intermediate and capital goods (but not
services)
– CPI: consumer goods and services
• Type of prices: wholesale/retail from selected
markets
• Indices calculated for products/sub-groups/groups/all
by calculating the weighted average of price ratios
between the current period and the base year
• Monthly data (earlier in WPI weekly for all
categories)
7
Base year
• Important to change base year occasionally
• New basket of goods/services with new
weights
– Substitution
– Innovation
Adjusting money income for inflation
• For a small proportion of the working people
in India, money income is automatically
adjusted depending on the inflation rate
• But for the vast majority money income does
not change at all (in fact often falls) when
prices rise
• Huge socio-economic problem in India
Inflation rate
• ((Pt - Pt-1)/Pt-1)*100
• Annual averages:
Pt = 52 week/12 month average of the index in a particular year
Pt-1 = 52 week/12 month average of the index of the previous year.
• Year-on-year (point-to point) basis:
Pt = Index in a particular week/month
Pt-1 = Index 52 weeks/12 months earlier
10
Year on Year Inflation Rate
15.0
10.0
5.0
Percent
0.0
3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 0 1 1 1
pr-1 Jul-1 ct-1 an-1 pr-1 Jul-1 ct-1 an-1 pr-1 Jul-1 ct-1 an-1 pr-1 Jul-1 ct-1 an-1 pr-1 Jul-1 ct-1 an-1 pr-1 Jul-1 ct-1 an-1 pr-1 Jul-1 ct-1 an-2 pr-2 Jul-2 ct-2 an-2 pr-2 Jul-2
A O J A O J A O J A O J A O J A O J A O J A O J A
-5.0
-10.0
WPI CPI
11
WPI: Annual Average rate of inflation
30.0
25.0
20.0
15.0
10.0
Percent
5.0
0.0
-5.0
-10.0
72 75 78 81 84 87 90 93 96 99 02 05 08 0-11 3-14 6-17
71- 74- 77- 80- 83- 86- 89- 92- 95- 98- 01- 04- 07- 01 01 01
19 19 19 19 19 19 19 19 19 19 20 20 20 2 2 2
