#dnaEdit: Anomaly in prices

The latest price figures show an apparent paradox. Prices of potato are reported to be rising by 61% while overall wholesale price index registered its lowest rate of rise in 58 months. Inflation in prices of fruits and milk shows similar sharp rise. According to official record, prices have fallen. You pay more. How come? People at large will possibly say statistics is a damned lie. 

Like most things, the devil is in the details. Wholesale price index has a much larger number of items than food articles. Manufactured goods form a major part of the basket and these prices have either remained constant or in some cases — crashed. The relative rise and fall in prices of different commodities give an insight into what is happening to the economy. 

The goods which have registered a price reduction are typically industrial raw materials and intermediate products used by the industry. If we match these price figures with the disaggregated figures of the Index of Industrial Production (IIP) released last Friday, we will see what is happening. These two sets of figures give us two major insights.

First, IIP showed a sharp decline in industrial production. Of the three segments of the economy which the IIP seeks to capture — mining, manufacturing and electricity — manufacturing contracted by 1%. Manufacturing being the dominant segment of India’s industrial economy, when this shrinks, it saps the demand for raw materials and intermediate goods. This automatically affects their prices. This is despite production in the  mining sector  showing secular decline for a long time, the industrial economy is really in deep trouble to have shown such price and production behaviour. 

On the other hand, isolating the prices of three items which have shown sharpest increase, would reduce wholesale inflation to a large extent. As such, the core WPI inflation — essentially a measure of manufactured goods price inflation — stands at just around 3.4%.  Earlier, the Reserve Bank of India used to decide its monetary policy on the basis of  this measure of price inflation.  But that’s no longer the case. The RBI now takes into account the retail inflation — measured by consumer price index — for formulating its monetary policy. This measure of price trends — which captures the actual price paid by the common man for his purchases — show a similar softening  trend at a much higher level. Released last Friday with the IIP figures, the consumer price index (CPI) is now hovering at 7.8%.

Here is the second lesson. A comparison between the  CPI and  WPI inflation rates primarily for  food items shows the hold of the market and trade over the final prices. While wholesale price inflation for cereals is rising by 3.7%, the retail inflation is higher at 7.4%,  wholesale vegetable prices are shown to have come down by nearly 5% but retail inflation in vegetables is 15.2%. In case of fruits, wholesale price inflation is 20.3% and retail 24.3%.

Onion and potato prices are not conveniently given in disaggregated figures in retail inflation measure which would otherwise have given incisive insights into market dynamics. The divergences show the extent to which trade jacks up final price. 

Unlike in the developed economies, the fight against inflation in our country is not just a monetary phenomenon. It is a fight for establishing a proper supply chain. It would perhaps be a fair and judicious move to direct more efforts at smoothening the marketing network in the country as most often farmers do not get a fair share of the high retail price for their products.