Producer Price Index &PPI Vs WPI and CPI
Producer Price Index tracks the average change in the prices of goods and services either as they leave the place of production or as they enter the production process. PPI thus measures the changes in price from the perspective of seller. Normally, a family of three indices is used as an indicator of rate of inflation or deflation. The three indices are linked to finished goods, intermediate goods, and raw materials or crude commodities.
Output Producer Price Index (Output PPI)
The measure of price change as they leave the place of production is known as Output Producer Price Index. Output Producer Price Index measures the average change in prices that producers receive for their outputs.
Input Producer Price Index (Input PPI)
The measure of price change as they enter the place of production is known as Input Producer Price Index. Input Producer Price Index measures the average change in prices that producers pay for their inputs.
Usages of Producer Price Index
The Producer Price Index is used by the government and private sector for a variety of purposes. They are
a. as deflators in National Accounts;
b. as a short term indicator of inflationary trends;
c. for indexation in legal contracts in both public and private sectors;
d. to inform business and government policy decisions; and
e. by international organizations such as the IMF for economic monitoring and comparison
PPI working group under chairmanship of B N Goldar
Government of India set up a working group on 21st August, 2014 under the Chairmanship of Professor B N Goldar for introducing Producer Price Index in India. The committee submitted its recommendations on 31st August 2017. Among other things, the committee recommended for
a. the data collected for WPI could be used concurrently for compilation of experimental Producer Price Index
b. item level weights should be based on the value of output available from the National Accounts Statistics and Annual Survey of Industries
c. Extending the scope of PPI to services and exports and imports is desirable.
Producer Price Index Vs WPI & CPI
Consumer Price index (CPI) measures changes in price from buyers or consumers perspective. Wholesale Price Index (WPI) measures changes in prices of bulk quantities at first stage of all intermediate and final products. Perspective of Producers Price Index differs from both CPI and WPI.
Wholesale Price Index (WPI) is based on the price changes in a basket of commodities without appropriate segregation of intermediate and final products. This may result in multiple counts which can lead to undesirable bias in measures of inflation. Multiple counting occurs when the price for a specific commodity and the inputs used for its production are included in an aggregate index. Producer Price Index minimizes the distortion arising from multiple counting by deriving weights from Supply Use Table compiled by the CSO.
Services are not covered in the basket for WPI. However, scope of Producer Price Index extends to services also.
