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.Inflation benign, according to WPI
. Prices raging, consumer price indices indicate

The price situation is confusing. If we go by the official wholesale price index (WPI), the price fever is ebbing.

The inflation rate has drifted downward - from over 6% at the commencement of 2007-08 to 3.1% as of the second week of October.

Not so, if we give credence to the trends in the consumer indices; whether in urban centres or in the rural heartland, the extent of the rise ranges between 5.7% and 8.8%.

On a point-to-point basis, the all-India consumer price index for industrial workers increased by 6.4% in September 2007 while the index for the urban non-manual employees spurted by 5.7%.

In the case of the rural masses- the most vulnerable segments of the society - the price spiral has assumed even more serious dimensions; the inflation rate for agricultural labourerswas as high as 7.9% and for rural labourers, the price surge was 7.6% in that month.

Thus, at the level where it matters most - the common man - inflation is a major problem, whichever consumer price index we consider - the one for the working class or that for the white-collared employee in cities and towns or the two indices compiled for the rural population.

Unlike the WPI which records the price at which goods are exchanged between the manufacturer and the bulk buyer/ stockist - the so-called producers’ prices - for the people, what has a stark immediacy, is the price movements at the retail level.

No wonder, when the inflation rate based on the wholesale index has now dropped to a five-year low, it fails to carry conviction with the ordinary man.

For him, the encounters at the market place tell a different tale in both urban areas and rural centres.

The impact of the price rise varied from one segment of the population to another but in no case, has the inflation rate dropped below the 5% mark.

Take the consumer index for the working class.During the first half of the current fiscal, barring June 2007 when the inflation rate fell to 5.7% - this too is quite high - in other months, the price rise was more marked, peaking to 7.3% in August.

For those in the higher echelons - the representative index for them is the all-India consumer price index for urban non-manual employees - the trend was similar and one of sustained high order of inflation, varying between a high of 7.7% in April to a low of 5.7% in September.

But, it is in rural India the price surge is most pronounced. The consumer price index for agricultural labourers has recorded a steep jump of 9.4% in April 2007 and has hovered close to 8% in the subsequent months.

The pattern was similar in respect of the consumer price index for rural labourers - for them, the order of the price increase oscillated between 7.5% and 9.1%.

From the above, one inference is clear. At the urban areas, the incidence of inflation - though serious - is not as severe as in rural parts.

Moreover, in the case of the working class or the white-collared gentry, most of them enjoy a degree of immunity from inflation due to indexation of their wages.

But, for the people who live in the country side and bulk of whom can be considered the poorer strata of society, the inflationary experience is the harshest as the maximum rise is shown by the consumer price index for agricultural and rural labourers.

How the dichotomy between the inflation rates based on the WPI and the various consumer price indices can be explained? First, the fallacy of relying on the WPI to gauge inflation has already been hinted at.

Second, as the Reserve Bank of India has pointed out in its latest monetary and credit policy statement, the drop in inflation rate is due largely to “base effects and the negative contribution from fuel prices”.

Perhaps, the best way to describe the WPI trend is “creeping” inflation while “galloping” inflation is the feature of consumer price index numbers.

We have four retail price index numbers so that there is no single figure of inflation rate unlike the WPI.

A consumer price index on the lines of the WPI is the need of the hour. To get an idea of what the retail price inflation rate for September 2007 would be, an exercise - admittedly crude and tentative - to derive a composite consumer price index from the four index numbers referred to above was undertaken.

The first step was to use the index for September 2006 as the base.

Then, the simple average of the two consumer index numbers for working class and urban non-manual employees was worked out for September 2007and similar average from the consumer index for agricultural and rural labourers was deduced for the same month.

With the urban and rural population proportions based on the 2001 census - 27.78% and 72.22% - serving as weights, the composite consumer price index for September 2007 was arrived at - and this index was 107.3. In other words, the year-on-year inflation for that month was 7.3%.

This is more than double the average inflation rate of 3.3% based on the WPI for all the weeks of September 2007.

The inference is strong that the wholesale price index-based inflation does not reflect the real price situation.