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Towards a meaningful index

Inflation is rising with a predictable regularity. For the week ending with May 24 it had climbed to 8.24 per cent, up from 8.10 per cent a week earlier. At this point the inflation as measured by the Wholesale Price Index is at a 45-month high. There are a few silver linings, however. Though climbing, the extent of increases on a week-to-week basis is becoming smaller. Also, the final inflation figures that are invariably announced after a lag do not show such sharp spikes as they used to till recently. These two factors — the relatively muted increases over the previous week as well as in the final revisions — need to be closely monitored before any meaningful conclusions are drawn on the future course of inflation. In any case, the recent hike in the prices of petrol, diesel, and domestic cooking gas will be reflected in the inflation data that will be released in about two weeks from now. The secondary effects of the increase in the prices of transportation fuels will, in the subsequent weeks, work their way through higher prices of such items as fruits, vegetables, and milk.

Meanwhile, there has been a renewed focus on the ways inflation data are calculated and updated periodically. The inflation rate is a measure of price increases over a pre-determined period but is not synonymous with the price level. In India it is well recognised that the WPI, which is used to track headline inflation on a year-on-year basis, is inadequate on several counts. It registers the change in the average price level of goods traded in the wholesale markets and is available on a weekly basis. More like a producer price index, the WPI does not reflect the prices that consumers pay. The four consumer price indices in vogue — CPI(Industrial workers), CPI(Agricultural labour), CPI(Urban), and CPI(Rural) — are made available on a monthly basis. Their main shortcoming has been that they are not representative of the entire economy. There is an urgent need to harmonise the various indices and evolve a single consumer price index to replace the WPI. India is one of the few countries that still rely on the WPI. A recent study by the IMF suggests that an index that takes into account price movements over the previous month rather than a whole year might be more appropriate here. Going beyond the methodology, it is necessary to collect and update statistics more frequently. After all, the inflation data have to reflect the situation at the ground level as closely as possible, if they are to be meaningful.

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