A single number for inflation is an aggregate across different commodities and services — the price rise differs for different items of consumption. So, the single number is arrived at by assigning weights to different commodities and services. For WPI, the weights in production are used; for CPI, the consumption basket is used. But people are not homogeneous. The consumption basket is vastly different for the poor, the middle classes, and the rich. Hence, the CPI is different for each of these classes and a composite index requires averaging the baskets.

Which one of the following statements best reflects the most logical, rational and crucial message conveyed by the passage?

Correct Answer: The present calculation of inflation rate does not correctly measure price rise of individual item/ commodity.

Explanation:

The passage highlights key aspects of how inflation is measured and the limitations associated with using a single, aggregate number:

1. Aggregation of Price Rise: The passage begins by stating that a single inflation figure is an aggregate across various commodities and services, whereas the actual price rise varies significantly across individual items.

2. Weighting and Heterogeneity: Inflation indices (like WPI and CPI) use fixed weights based on production or standard consumption baskets. However, because different socioeconomic groups (poor, middle class, rich) have vastly different consumption patterns, a single aggregate number fails to reflect the true impact of price changes on individual items or specific consumer classes.

3. Logical Deduction: Since the inflation rate relies on averaging across diverse baskets, it does not give an accurate picture of the specific price movements for individual items/commodities or the varied experience of individual consumers. Therefore, the option stating that the present calculation of inflation rate does not correctly measure the price rise of individual items/commodities best captures the central, logical message of the passage.