Retail inflation. Timely base revision with consumer expenditure survey can address policy maker’s concerns on inflation forecast: RBI bulletin

Senior officials of Reserve Bank of India have recommended expediting efforts to conduct a new consumer expenditure survey (CES) for rebasing consumer price index (CPI) to a recent period so that the CPI consumption basket reflects the current household consumption behaviour and prevents instances of missing/thin price quotes.

Timely base revision with synchronous CES, price and market survey every five years can address policy maker’s concerns vis-a-vis analysing and forecasting inflation, said Praggya Das and Asish Thomas George from RBI’s e-Monetary Policy Department in an article in the central bank’s latest monthly bulletin.

To arrive at the all-India indices, the present two methods of aggregation of CPI for item level indices on the one hand and indices at sub-group/group and the all-India level on the other, at times makes assessment of prices and it’s forecast a challenge, especially when there is considerable time lag in base revisions, they added.

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The authors observed that the present method of horizontal aggregation of CPI, across sectors and States/Union Territories for all-India item level indices as well as for indices at sub-group/ group and overall, is at times creating challenges for use of the index for monetary policy.

This is because the inflation based on the aforementioned methodology reflects, in addition to changes in prices of goods and services, data kinks that emanate from the aggregation methodology—the January and February 2023 CPI prints are the latest examples.

The RBI officials recommended that the technical advisory committee on statistics of prices and cost of living (TAC on SPCL) that guides NSO on preparation of CPI may consider the change in aggregation method so as to make the index more usable for policy analysis.

For the central banks, inflation target mandates for the monetary policy are generally defined in terms of CPI and as such high quality CPIs are critical for effective monetary policy making.

“The current CPI base of 2012 is derived from the consumption expenditure survey conducted during 2011-2012. The market survey to identify shops for collecting prices is even older,” the officials said.

The officials noted that following the release of the January 2023 provisional CPI print by NSO, there had been a debate on the aggregation methodology followed in CPI as a result of large divergence in the headline CPI inflation published by the NSO over that of a derived overall CPI inflation that users computed from a weighted aggregation of the CPI item level data.

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The debate continued even after release of the February CPI data.

The authors said the divergence between price indices compiled by horizontal and vertical aggregation can arise mainly from two sources—missing prices (for seasonal or non-seasonal reasons) and treatment of zero price (such as when the government decides to fully subsidise a particular good or service that was hitherto charged nominal price and as was seen in the January and February 2023 CPI prints).

“At present there is no guidance on proper treatment of zero prices—such as in the recent period when PDS prices were slashed to zero—in the NSO’s CPI manual. Drawing from international practices, such cases may be considered as zero-prices and not missing prices,” the officials said.

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