Media reports about price rise pinching consumer pockets far beyond the 4.7% official inflation rate have questioned the integrity of government statistics. In a remarkable recent episode, trade unions have objected to the ILO that workers mistrust the revised consumer price index (CPI) for industrial workers (base year?2001). Steps must be urgently taken to create a transparent weekly CPI available within a fornight.

Currently, for watching inflation in India we have the choice of using the CPI or the wholesale price index (WPI). The pros and cons of the two are as follows.

? Frequency: the WPI is released weekly, while the CPI is monthly.

? Delays: as an example, as of today (June 19), the most recent available WPI pertains to June 3, 2006, but the most recent available CPI pertains to April 2006.

? Choice of commodities and weights: the WPI reflects neither producer prices nor consumer prices. It suffers from a questionable choice of commodities and weights. Adequate care has not been taken in accurately defining the grade and physical specifications of commodities. The CPI has a fundamentally superior methodological foundation, for a household survey is utilised to find out the consumption of a ?typical? household, and this drives the choice of commodities and weights.

? Transparency: data about the series going into the WPI is released into the public domain. The CPI is much more non-transparent. When the government releases a GDP number, households do not feel they have an independent view about GDP. But when it comes to inflation, everyone who shops has a view about the ?true? inflation. The non-transparency of CPI has encouraged mistrust of the CPI and conspiracy theories about manipulation of data by the government.

So, while the CPI fundamentally makes more sense than the WPI, the usefulness of the CPI has been radically undermined owing to low frequency, high delays and non-transparency. Consequently, the ?headline inflation number? widely followed in the press has become the WPI.

• While the WPI is released weekly, the CPI is released on a monthly basis
• WPI doesn?t reflect either producer prices, consumer choice of commodities
• WPI data released into the public domain; CPI?s remains non-transparent

A major achievement of macro policy in India in the past decade has been a decline of inflation to sub-5% levels. A healthy feature of Indian politics is that there is an uproar when inflation goes up; this acts as a check against a government that might seek to impose an inflation tax upon bondholders. However, inflation in India remains high by world standards, where well-run central banks target inflation rates like 2-2.5%. India?s finishing stretch, in going from inflation of roughly 4% to roughly 2-2.5%, strongly requires better measurement, for we would now be dealing with small and subtle changes in inflation.

A committee headed by Planning Commission member Abhijit Sen has been given the task of constructing a producer price index (PPI) for India. However, it is equally important to transform the CPI. The CPI needs to shift to a weekly frequency, with a lag of no greater than one fortnight. It needs a top quality methodological foundation in terms of a household survey which is no more than three years old, where the full survey database is released into the public domain so that there are no accusations about fudging weights or commodities.

Finally, every piece of price information that goes into the CPI needs to be released into the public domain. This needs to be done for historical data also, so as to enable innovative applications of this information and improve the trustworthiness of the CPI.

Once inflation measurement is improved, two major developments can take place. The first is the issuance of inflation-indexed bonds. Perhaps a quarter of the bond issuance of the government of India needs to be shifted to inflation indexed bonds. The reason for this is two-fold. First, households who seek to plan for old age without uncertainty about inflation should be able to do so. Second, the secondary market trading of inflation-indexed bonds reveals the market?s perception about expected inflation, a key ingredient that goes into monetary policy formulation.

The second major development would be a more modern monetary policy that explicitly links developments on inflation to the short-term interest rate setting of the central bank. At present, it is impossible for RBI to be scientific about monetary policy, for the foundation of that (inflation) is not properly measured.