Inflation

Definition : 

Inflation is a sustained increase in the average price of all goods and services produced in an economy. or It is a percentage change in the overall price levels between two periods measured by a price index.

Impact : 

Money loses purchasing power during inflationary periods.

Types :

Long Term : When the money supply grows at a faster rate than the output of goods and service. This is often described as " too much money chasing too few goods."

Short Term : It can result from various shocks to the economy like food pricing, currency pricing etc. shocks are common example.

Calculation :

If we have the WPI values of two time zones, say, beginning and the end of the year, the inflation rate for the year will be :
[{(WPI of the end of year - WPI of the beginning of the year)/WPI of beginning of the year}*100]
Since WPI figures are available every week, inflation for a particular week is calculated based on the above method. This is how we get inflation rates in India.

WHOLESALE PRICE INDEX

WPI (Wholesale Price Index)

WPI is the index that is used to measure the change in the average Price level of goods traded in wholesale market.
"In India, a total of 435 commodities constitute the basket."
This Price Index is available on weekly basis. 
The Indian govt has taken WPI as an indicator of the rate of inflation in the economy. 
It doesn't take into a/c the price at which consumer buy goods, but in the wholesale basis.
Food inflation is an element of WPI, i.e a basket constituent of WPI

CALCULATION OF WPI (Wholesale Price Index):

WPI is calculated on a base year and WPI for that base year is assumed to be 100. To show the calculation let's assume the base year to be 1970.


Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs. 5.75 and in 2014 is Rs. 6.10.

The WPI of wheat for the year 1980 will be Rs. 6.09

i.e [{(6.1-5.75)/5.75}*100} = 6.09
[{(price of wheat in 1980 - price of what in 1970) / Price of wheat in 1970}*100]

Since WPI for the base year is assumed as 100, WPI for 1980 will become 100+6.09=106.09.

In this way individual WPI for the remaining 434 commodities are calculated and then the weighted average of individual WPI figure are found out to arrive at the overall wholesale price Index.