How to calculate inflation rate

Ever since I started studying Economics, this word “inflation” had been making its presence in my economic dictionary. But today I actually got the chance to dig this word more deep and really enjoying knowing how it works.

The general formula for calculating the Inflation Rate is to use Consumer Price Index but in India, we use WPI- wholesale Price Index, because of some serious flaws in gathering CPI data.

So if we want to know how much prices have increased over the last 12 months (the commonly published inflation rate number) we would subtract last year's index from the current index and divide by last year's number and multiply the result by 100 and add a % sign.

Formula for calculating inflation
((P0 –P1)/P0)) X 100
So if exactly one year ago the Consumer Price Index was 180 and today the CPI is 185, then the calculations would look like this:
((185-180)/180)*100
or
(5/180)*100
or
0.0277*100
which equals 2.77% inflation over the sample year.

If prices go down then we experience Price Deflation.

calculation of inflation in India :
1. The CPIs in India are computed on a monthly basis, while the WPI is computed every week. In India we use WPI for calculating inflation.

2. The WPI has an All Commodities Index, which consists of four three major groups - Primary Articles; Fuel, Power, Light & Lubricants; and Manufactured Products. These are again broken up into smaller sub-groups. For instance, the primary articles group would have food articles, non-food articles and minerals. Each of these sub-groups would have several individual commodities in them.

3. The WPI has been periodically revised from the time it was first constructed in the 1930s

4. The current WPI tracks prices of 435 commodities, of which 98 are primary articles, 19 fall in the fuel, power, light & lubricants group and 318 are in the manufactured products group.