Inflation measurement in India, purely from the statistical point of view, has historically remained a complex phenomenon. While worldwide, inflation rate is captured in terms of representative consumer price index (CPI), for historical reasons, India has the unique practice of adopting inflation rate based on wholesale price index (WPI) for policy purposes.

This is for a variety of reasons. First, the available CPI series are not representative of all classes of people. CPI numbers presently compiled and released at national level reflect the fluctuations in retail prices pertaining to specific segments of population in the country, viz. industrial workers, agricultural labourers and rural labourers. These indices do not encompass all the segments of the population in the country and as such do not reflect a true picture of the price behaviour in the country.

Second, CPI coverage is limited to the consumption basket, whereas the coverage of WPI is all-inclusive, and third, till recently, WPI series were available at high frequency of weekly intervals and with a shorter time lag compared with CPI. The most popular CPI is for industrial workers; for wage indexation, while CPI (IW) is extensively used. However, for a variety of other policy purposes, WPI is largely used.

New series of CPI

To overcome the limitation of the lack of a representative CPI, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling a new series of CPI for the entire population, further bifurcated into CPI (Urban) and CPI (Rural), which would reflect the changes in the price levels of various goods and services consumed by the urban and rural population. These new indices are compiled at State/UT and all-India levels also.

While monthly indices with year 2010 as the base were released since January 2011 onwards, an annual inflation rate based on the new CPI was released by the CSO on February 25, 2012, providing the numbers for inflation rate for January 2012 over January 2011.

Major trends

The annual inflation rate on this basis was placed at 7.65 per cent, and the corresponding inflation rates for rural and urban were placed at 7.38 per cent and 8.25 per cent, respectively.

Category-wise, vegetable prices showed a steep decline by as much as 24.83 per cent. Cereals and products and sugar etc showed rates of inflation in single digits at 2.69 per cent and 1.84 per cent and the pulses and products slightly higher rate at 5.66 per cent. Protein items such as milk and milk products and egg, fish and meat showed inflation in double digits and so was the case with oils and fats. Food and beverages as a whole showed a moderate inflation of 4.11 per cent.

Thus, the overall high inflation during the period is explained by non-food items, namely fuel and light (13.13 per cent) and clothing, bedding and footwear (14.25 per cent).

The new CPI also enables measurement of inflation, state and union territory-wise, separately for rural and urban and the combined inflation. Though it was not published officially, inflation rates worked out state/UT-wise for January 2012 over January 2011 based on the indices available showed that the inflation rate varied in a wide range across states/UTs.

For rural, it ranged between (-) 1.3 per cent for Dadra and Nagar Haveli and 22.9 per cent for Meghalaya; and for urban, it ranged between 6.4 per cent for Tripura and 11.5 per cent for Mizoram; and the combined inflation ranged between 1.2 per cent for Dadra and Nagar Haveli and 18.7 per cent for Meghalaya. Overall, the urban inflation seems to be range-bound compared with rural inflation and significant variations across states/UTs were explained more by variations in rural inflation.

Comparison of new and old

Since the new inflation rate year-on-year is available only for one month, January 2012, it will be difficult to attempt a comparison of the new CPI inflation either with CPI (IW) or CPI (AL).

However, since the new indices are available monthly since January 2011, a month-over-month variation in inflation rates is comparable with other indices.

EPW Research Foundation (EPWRF) in its monthly money market review published in the Economic and Political Weekly dated February 25, 2012, after reclassifying various items covered under WPI into consumer items and non-consumer items, attempted a comparison of the year-on-year monthly variation in WPI (consumer items) with CPI(IW) since April 2005.

The review observed that irrespective of differences in coverage of commodities and nature of price quotations, the CPI (IW) mimicked WPI (consumer items) very closely. It was also clear that the large divergence observed between CPI (IW) and WPI inflation rates during the period August 2008 to August 2010 was explained by variations in non-consumer items, most of which were subject to global influence or domestic supply shocks during the crisis period.

A month-over-month variation in the new CPI is presented along with comparable variations in CPI (IW) and also CPI (AL) in the accompanying table, which presents similar variations in WPI (consumer items) also.

Stunning Similarity

The month-over-month variations in the different indices show a very striking similarity, which is evident looking at the table. Quantitatively, the variations in CPI (New) correlated with CPI (IW) at 0.879, with CPI (AL) at as high as 0.927 and even with WPI (consumer items) at a significant 0.753. This very close movement across indices, irrespective of the differences in base, basket of goods covered, nature of price quotations and weighing diagram, is indeed puzzling.

While the data is limited to a one-year period of 12 months, this may be a point for further research both by statisticians and economists to understand what explains this similarity and to gain deeper insights for policy making, from both demand and supply sides.

(The author is Director, EPW Research Foundation. The views are personal)

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