Theres A Twist In The Inflation Tale

New Delhi, July 30 | Updated: Jul 31 2004, 05:46am hrs
After rising for three weeks, the rate of inflation stood firm at 6.52 per cent for the week ending July 17. However, the discrepancy between the rates of inflation measured by the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) continues. (see chart)

During the corresponding period last year, the rate of inflation was 4.65 per cent, according to the WPI data for all commodities released by the ministry of commerce and industry on Friday. Although the prices of essential primary articles and manufactured products rose, the increase was neutralised by softening fuel (bitumen, naptha and furnace oil) prices.

The annual rate of inflation, according to finance secretary D C Gupta, is likely to remain around 5 to 5.5 per cent, a projection shared by the Reserve Bank of India (RBI).

The WPI rate of inflation, which is measured on point-to-point basis, is somewhat different than the CPI-based inflation. According to the latest CPI for industrial workers (CPI-IW), the rate of inflation was 2.83 per cent in May 2004. In fact, the gap between the WPI and the CPI had widened in the month of May 2004.

Ideally, the CPI(IW) should follow the WPI over a longer period of time. But according to former chief economic advisor (CEA) Dr Shankar Acharya, this is not wholly true. This is because commodities have different weights in the two indices. Even the basket of commodities are different.

The problem with the CPI is that its base year is more than two decades old. The current CPI-IW series has 1982 as the base year. The CPI does not capture the changing consumption pattern. In the current series, food has a weight of 57 per cent, while the fuel group has a weight of only 6 per cent. The services, which are lumped in a miscellaneous group, only have a marginal representation in the index.

The revised CPI-based index, which has been on the anvil, is likely to capture changing consumer tastes and preferences and provide a more realistic reflection of consumer-based inflation.