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Producer Price Index (PPI) 

The Governor of RBI, D. Subbarao has mooted for a Producer Price Index (PPI) to measure

the average change over time in the sale prices of domestic goods and services. Currently, it

uses Consumer Price Index (CPI) and Wholesale Price Index (WPI) to aid in measuringinflation.

But WPI does not capture price movements of services and is also a hybrid of consumer and

producer price quotes. CPI captures the prices of significant commodities at retail level but

not at producer level.

What is PPI?

  Producer Price Index is the measure of the average change in selling prices received

by domestic producers for their output over a period of time.  The prices included in the PPI are from the first commercial transaction for many

products and some services.

  It measures price changes from the perspective of the seller.

Advantages of having PPIs:

  Will be globally comparable Will not include hidden costs like shipping, taxes and

other levies thus provides a much clear picture of inflation

  Will give a view of the economy’s efficiency in transferring goods and services from

first level of transaction to other level.

Where do CPI and WPI fall short?

Loopholes in WPIs:

  Incongruent with global standards as most of the nations either use CPI or PPI

  Considers only goods and not services which is a huge part of our economy and can’t

be neglected

  The rates are mostly captured from mandis or places of wholesale business.

 

Hence they don’t include prices at household consumer level.

Loopholes in CPIs:

  Measures the change in the important commodities at the retail level but not at the

producer level.

  The indices for rural labourers, agricultural labourers and industrial workers are

badly targeted to be used for macro policy making.

  Started in January, 2011, it falls short of having sufficient history to aid data analysis

and to be used as a sole headline measure of inflation.

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  The prices determined at consumer level are affected by subsidies, sales and excise

taxes and distribution costs.

Which one is better b/w CPI and WPI?

 

CPI is still considered a better option over WPI as it gauges changes in the general

price level of goods and services at the household level.

Ques:

Consider the following statements regarding, Producer Price Index (PPI):

1.  PPI measures price changes from the perspective of the seller.

2.  PPI is a better indicator of price changes.

3.  PPI does not consider services.

4. 

PPI takes into account taxes .

Which of the statements given above is / are correct?

(a) 1 and 2 only (b) 1, 2 and 3 only

(c) 2 and 4 only (d) 1 , 2 , 3 and 4

Ans: A

Exp:

  Government has set up a panel under Professor B N Goldar to devise new Producer

Price Index to replace Wholesale Price Index.

  The proposed index will seek to bring India's inflation gauge on a par with

international standards, with PPI tracking changes at the producer level for both

goods and services and CPI providing details of retail prices.

  WPI includes taxes while PPI tracks inflation minus tax component.

  While the present WPI does not considers services, PPI includes services.