The Hindu Business Line : The WPI, PPI, CPI confusion

US inflation talk is subdued, practically absent, these days. The feeling is that the economic slowdown is so severe that businesses have no scope to raise prices. On the contrary, they must discount to be rid of their inventories. The crash in commodity prices is a huge bonus for manufacturing costs — the CRB index of commodity prices has plunged from 400+ to about 230 in just weeks. At this level it is back near 200 – its low point about five years ago.

In India, the inflation picture is not so sanguine. While the Wholesale Price Index (WPI) is down from its peak of over 12 per cent to below 9 per cent in the latest reported week, it is still too high for comfort. But the fear of a demand and financial collapse has trumped inflation fear and prompted Government and the RBI to cut interest rates sharply (with possibly more on the way) and inject liquidity of hundreds of thousands of crores of rupees.

The focus on WPI for policy-making is itself flawed. The right price level measure is the consumer price index (CPI), which can (and does) deviate from the WPI. India is probably alone among the world’s major economies in using the WPI as its inflation benchmark. (Is it because the CPI’s behaviour provides scant relief to our policy architects)?

In fact, the G-7 economies do not have a WPI measure at all. Coming to think of it, that makes sense. For, what is the point in reporting the prices of two identical baskets of goods at the wholesale and retail levels?

What is needed is a price index for industry. And this, in the G-7, is the Producer Price Index (PPI). But many (those making, writing about policy) in India, think their PPI is equivalent to our WPI. They could not be more mistaken.

The G-7 PPI contains among others metals (steel, aluminium, copper, etc.), chemicals and other intermediate goods and capital goods as price constituents as any manufacturing and business cost index must. It is least a measure of the cost of living for households. No G-7 government or central bank would dream of using the PPI as the prime inflation measure. (Still, if the PPI goes up faster than the CPI, it would suggest that not all cost inflation is being -or able to be- passed on to final consumers. This has been generally true of the G-7 economies in the last several years because retail inflation has been far less than the explosion in commodity prices during the commodity boom).

Our WPI is not even a representative of the consumption basket of any household. The idea of the WPI as the inflation gauge, must, therefore, be completely revisited. Whose inflation do we want to track and what do they consume?

Inflation management starts with the right answers to these questions.

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