Actual inflation 90 bps higher than imputed inflation of NSO: SBI’s Ecowrap

The actual headline inflation for June 2020 is almost 90 basis points higher at 6.98 per cent than the imputed inflation of the National Statistical Organisation (NSO), going by the State Bank of India-computed COVID Consumer Price Index (CPI).

After a hiatus of two months, the Ministry of Statistics and Programme Implementation (MOSPI) released the CPI for June 2020. The combined CPI stood at 6.09 per cent for June 2020, compared to 6.27 per cent in May 2020 (imputed).

SBI’s Economic Research Department (ERD), in its report titled ‘Ecowrap’, observed that the Covid-19 pandemic has also introduced an outlet bias, as a large share of total spending moved online that is charging a mark-up over offline prices. Most retailers in these platforms tend to have higher prices than in their physical stores, it added.

The Department underscored that: “Since this is not accounted in the data collection methodology used by the NSO, the change in spending outlets could cause another downward bias in the headline CPI as computed by NSO. If NSO considers online prices, there would be further 10/15 basis points impact on CPI inflation.” One basis point is equal to one-hundredth of a percentage point.

Discretionary card spends down

The ERD has assessed that the proportion of non-discretionary to discretionary card spends that was 65:35 in the pre-lockdown period is now approximately 80:20, with a pronounced downward bias for discretionary spends.

“Given this observation, we estimated the shifting consumption expenditures and thereby readjusting the consumer weightages in CPI. We call this measure SBI Computed COVID CPI.

“Based on our new weights, as per our SBI Computed COVID CPI, the actual headline inflation is much higher than the imputed inflation,” the report said.

Under-reporting CPI

SBI’s  ERD observed that due to non-availability of data, the index for the sub-groups, say, for example ‘Clothing & Footwear’ group, were imputed by simply using its last quoted price scaled up by the relative increase in CPI of the current month / June to that of the last observed month / March.

“However, this is a pure statistical exercise by the NSO without even understanding the problem that distorts and even under-reports the headline CPI.

“With lockdowns, the fixed basket on which inflation is calculated is totally irrelevant, as many of those typical items, particularly services, are no longer available / disappearing product problem,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

For example, in the Indian context, the share of products within the Services category with missing prices in the headline CPI was 22.4 per cent in April 2020 as imputed by the NSO, the report said.

Hence, extrapolating the price trends of the overall CPI basket (which were largely driven by food and fuel sub groups) to key Core components such as Clothing, Footwear, etc. by the NSO, is puzzling and incorrect, it added.

“This has resulted in a paradoxical problem of a significant jump in prices of commodities like Clothing and Footwear and even intoxicants in April when the country was in the midst of the strictest lockdown and these commodities were not even consumed,” Ghosh said.

MPC decision: Hard one to make

With the onset of the Covid-19 pandemic, the report observed that India, alongwith the majority of middle and low-income countries, has been experiencing rising consumer prices.

The pandemic accelerated the recent global trend of disinflation. The average annual inflation rate plunged from 3 per cent in February 2020 to 1.6 per cent in April 2020.

Ghosh noted that: “In the case of India, we believe that inflation will remain at elevated levels for the next few months due to supply-side constraints and labour shortage, rather than due to fiscal deficit and external factors, except crude.

“However, the situation is extremely volatile and uncertain and the previously published numbers can see revisions.”

In this context, he felt that a decision (for rate cut) in the forthcoming Monetary Policy Committee (MPC) meeting will be a hard one to make.

“However, with real consumption set to be adversely impacted, governments and central banks in respective countries will be more concerned with the welfare implications of the pandemic on real consumption.

“To that extent, while an August rate cut looks difficult / touch and go, we still believe RBI could be looking through the CPI numbers through the cycle and not at a point in the cycle,”said Ghosh.

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