During April 2016 to October 2021 (67 months), the overall CPI inflation was above 4 per cent in 27 months, above upper ceiling of 6 per cent for 14 months, hovered between 2-4 per cent for 24 months, and stayed below 2 per cent for 2 months. Both CPI and WPI have shown upward trend since Q3 of 2019-20 when GDP declining from Q3 of 2019-20. One reason for elevated CPI and WPI was increased global commodity prices including fuel.

Growth started decelerating from Q4 of 2018. This deceleration iwas due to moderation in global output growth, deceleration in growth in global trade, domestic expectation, lower investment, and factors such as demonetisation, and stabilisation issues relating to GST. From March 2020, growth has been affected by the pandemic.

Monetary policy considers inflation based on CPI. In inflation based on CPI, food inflation has been more volatile. Food inflation is seen to have a standard deviation exceeding the mean inflation during 2017-19. Inflation of non-food items, core (non-food, non-fuel) and services have been steady and sticky as well.

Variation in inflation is seen to be clearly contributed by food inflation. However, food and fuel inflation are generally believed to be structural as their demand is less elastic to prices. Hence price rise is more supply related and, therefore, somewhat insensitive to monetary policy. If we seek guidance from inflationary expectations numbers in India, they are far removed from the inflation that is realised later.

Core inflation stickiness

The relative stickiness of non-food and core inflation is somewhat puzzling. We witnessed two opposite shocks: one, upsurge due to accommodative monetary policy and the other, deceleration due to moderating growth. Besides being sticky, core inflation has started moving upwards since October 2019. Fuel prices have been high in the recent past thanks to taxes and duties. An assessment of CPI in past few years indicates that food was the prime mover of inflation until 2019 which started declining since then.

The normal behaviour in India is that food inflation spills over to services, but we found that deceleration in food inflation did not affected inflation of services. They remain sticky. We attempted an exercise in correlating overall inflation with its various components. We found that correlation with food inflation was very high, while correlation with non-food, core and services are insignificant.

We attempted to calculate standard deviation of core inflation with its various components. We found that except during 2014-15, the standard deviation of core inflation with overall CPI inflation continued to remain very low. They were moving in narrow band around mean CPI. The only exception was in 2019-20 where inflation averaged 3.82. per cent. On further examination it was seen that sticky core inflation was not due to prices of consumer durables which had remained moderate during 2015-2020. Inflation of services remained sticky and this contributed to the stickiness of core inflation in line with their share in weight for non-food commodities.

CPI numbers are arrived at based on consumption expenditure of household as observed in NSSO survey of 2011-12. This base has not yet been updated. The government addressed the hunger problem during pandemic through free supply of essential foodgrains to the most vulnerable section of population.

This programme has been extended till March 2022. Though income of this group has been considerably eroded, essential foodgrains were available to this section of population. It is known that inflation has a differential impact on the different classes of household as the consumption basket differs for these households.

Aggregate CPI conceals the food and non-food expenditure composition for these households. We did an exercise to decompose CPI with revised weights to food and non-food and observed the different inflation patterns. For consumers where food accounts for 80 per cent of expenditure, inflation sharply decelerated during the pandemic and the gap between CPI with food weight 80 per cent and CPI with food weight 20% widened after Q3 and Q4 of 2019-20.

The segment of population where food accounts for 80 per cent of expenditure is not only most sensitive segment from the viewpoint of inflation but are also vulnerable to slow down in output growth and employment.

Percentile-based consumption expenditure and commodity composition available in the NSSO surveys indicate that consumption basket differs for each class of consumer. Labour Bureau compiles consumer price index for agriculture and rural labourers. This statistic attempts to capture vulnerabilities at rural level to some extent.

However, their base goes back much beyond 2011-12. If we look at the consumption pattern based on NSSO Survey and that which is derived from national income accounts, we found that there is a continued downward bias to the consumption expenditure based on NSSO Surveys. This downtrend bias has only continued to accentuate. Despite this difference in NSSO and NAS (National Accounts Statistics) private consumption expenditure, inflation as measured by private consumption expenditure deflator and the overall CPI were nearly aligned until Q4 of 2019.

However, in the last six quarters, they have moved in different directions. This is a clear indication that commodity composition in the NSSO Survey has completely changed. A new composition based on current consumption should be immediately established if we should get a clear understanding of the behaviour of the CPI.

This has significant impact on the monetary policy and certainly on the direction for taking investment decisions by various economic agents.

Gopalan is former Finance Secretary, and Singhi is a Senior Economic Advisor, Ministry of Finance

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