Comparison of WPI vs CPI : An analytical study on inflation targeting and rate cuts by central bank

Abstract

Inflation is the measure of sustained increase in the price level or equivalently average level of prices of all the goods and services in an economy. In an inflationary situation, not all items experience the rise in the prices but the average level of prices for a few items show excessive increase while others do not. A rising inflation would mean that the purchasing power of the currency is falling, in other words you will not get the same quantity of goods for the same amount as you could have got last year. For example, suppose Mr. X has INR 100 with him, and 2 choices, he can either go for a sandwich today for INR 100 or save it to consume after one year (without returns on the savings). If he wishes to consume the sandwich after one year, the price of the same product is now INR 110 and he is 10 rupees short. Money we use for transactions has no value (unlike gold), so if INR 100 would have fetched him one sandwich one year ago, he cannot buy it for 100 today. Thus the purchasing power of the currency has fallen, due to rising inflation.