Inflation is down, thanks to new index

While prices of goods remain uncomfortably high in the marketplace, the government has statistically brought down inflation by a whole percentage point merely by reworking how it is calculated.

On Tuesday, the government revised the way the wholesale prices index (WPI) is calculated, and the new inflation figure dropped with a thud to 8.5% for August. Inflation calculated with the old WPI is 1% higher at 9.5%. One reason for this is the lower weightage assigned to food items in the new index.

The new index covers 676 items, and collects more than 5,000 price quotations using 2004-05 as the base year to measure price increase or decrease. The old index used to cover 435 items and was calculated using 2,000 price quotations, based on 1993-94 prices. Since 2004-05 was the first year of the UPA government, you could say the new index is the UPA price index.    

The new index, despite bringing down the prices by 1%, is widely regarded as an improvement on the old one because the consumption basket has changed since 1993-94, when the old index was constructed.

The WPI index is broadly divided into three groups - primary articles, manufactured products and fuels. In the new index, items like flowers, lemons and crude petroleum will also be covered in the primary articles group.

The manufactured group has also been enlarged by taking into account prices of food products like ice-cream, canned meat, palm oil, readymade/instant food powder and mineral water.

Products like computer stationery, leather products, scooter/motorcycle tyres, polymers, petrochemical intermediates, granites, marbles, gold and silver, construction machinery, refrigerators, computers, dish antennas, transformers, microwave ovens, communication equipment (telephone instruments), TV sets, VCDs, washing machines and auto parts have also been taken in the ambit of manufactured products. The fuels group remains unchanged.

Widening the WPI cover also means that the weightage given to each product while calculating inflation changes. For example, the weightage for food articles has been reduced in the new index.

“The shift in component weights could pull down the headline WPI inflation readings marginally, about 1% in the case of August inflation,” said Frederic Neumann and Prithviraj Srinivas of HSBC Global Research in a note.

Based on the old index, August inflation came at a sticky 9.5% from 9.95% in July. “Even if we look at the old series of WPI there has been a slight decline in August inflation compared to the previous month,” said Devendra Kumar Pant, director, Fitch Ratings. In July, inflation stood at 9.8% under the new index.

The change in base prices from 1993-94 to 2004-05 also led to a decline in the inflation rate. The base was more favourable for August data in the new index,” said A Prasanna, economist, ICICI Securities Primary Dealership.

Going forward one could expect the inflation number to come down and become less volatile. “Headline WPI inflation should become less volatile under the new measure due to the reduction in the weight of the usually volatile food series in the new index,” said HSBC Global Research.