Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads : (1) Increase in demand (2) Reduced supply.
Inflation at Producer Level
As of now in India, there is no index to measure inflation at producer level. A Producer Price Index (PPI) is proposed, but so far this type of inflation calculation has not started in India.
Inflation at Wholesale Level
This is the most popular inflation rate calculation methodology in India. The index used to calculated wholesale inflation is known as Wholesale Price Index (WPI). This inflation rate is often known as headline inflation. WPI is released by the Ministry of Commerce and Industry. Though RBI used WPI for most of its policy decisions before 2014. But WPI based inflation calculation was not false proof. WPI shows the combined price of a commodity basket comprising 676 items. But WPI does not include services, and it neither reflect the bottlenecks between producer and wholesaler nor between wholesaler and retailer (consumer).
Inflation at Retail Level (Consumer Level)
Consumer often directly buys from retailer. So the inflation experienced at retail shops is the actual reflection of the price rise in the country. It also shows the cost of living better.
In India, the index which shows the inflation rate at retail level is known as Consumer Price Index (CPI). CPI is based on 260 commodities, but includes certain services too. There were four Consumer Price Indices covering different socio-economic groups in the economy.
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