There is a lag effect. One has to look at the composition of the product basket. The CPI is not a measure of inputs but of final goods, whereas the WPI captures both inputs and final goods. Within a value chain, you can have some items where there is no pricing power -- that is what is getting reflected in low WPI core inflation due to loss of pricing power of manufacturers. However, the retail margins can be fairly high, which will show up in a higher core CPI inflation. One has to drill down a little more.
You also have to look at how the data are collected. In case of the WPI, we take the wholesale prices. In case of the CPI, you do a market survey and determine a dominant brand in a geographical area and once it is chosen, the price quotation is taken. The dominant brand can be different for different areas and need not be the highest-selling brand of the country. The price changes can also differ among the brands, and reflect local features.
Q: Experts are doubting the CPI data on grounds of data discrepancies. Despite having different weightage of food, fuel, manufactured products and services, why are the rural and urban CPI inflation rates have more or less moved together for several months between June 2012 and May 2013?
Such convergence is possible. The difference between in the weightage of food products in the new CPI rural and CPI urban – 59.31% and 37.15%, respectively-- is less than widely presumed. In contrast, the weightage of food in CPI-AL (CPI for Agricultural Labourers) is 73%. That is why you see such a large divergence between new CPI and CPI-AL. The gap is much less for the new CPI rural and CPI urban.
Of course, the new CPI is, in a way, more robust as it even gives the geographical trend. The weightage of food and other items vary a lot among states.
The rural and urban inflation rates may show similar trend with greater integration of markets. Aspirations and tastes (of rural consumers) are changing