Monthly inflation stats makes sense

The in-principle approval to compilation of the wholesale price index — to measure the headline inflation rate — on a monthly basis has much to laud.

For one, by adopting this course, India will fall in line with a practice in vogue across the globe.

For another, the present arrangement is rather confusing — a weekly monitoring of trends in primary articles and fuel & power that does not convey much about the unfolding price situation as these two sub-group indices account for only 35% of the weight in the overall index.

Even the so-called food inflation gleaned from these weekly data does not yield a holistic picture of the price trend in food items as a large chunk of manufactured food products is outside its purview, such as sugar, edible oils and salt.

This switchover is to be welcomed for an even more basic reason. Statistically, it makes sense. 

The index series with 2004-05 as base is the most comprehensive ever, boasting of 676 commodities for which as many as 5,482 price quotations have to be gathered from major markets at regular intervals.

As an attempt to obtain a realistic and reliable gauge of the underlying price trends in the economy, this is as it should be. But, inevitably, the compilation of the index has suffered from a low response ratio, necessitating the repetition of the earlier price quotation for some of the items or making a guess as to what it is likely to be.

Whether it is the issue of the index weekly for primary articles and fuel group or the monthly index incorporating also the manufactured group index, the wholesale index has suffered from this flaw. Though a revised index is published after a lag of eight weeks or two months, the revised figure of inflation is seldom accorded importance as it had become passe’ by then. Thus provisional headline number which may not be true hogs all the headlines.

Ironically, empirical evidence suggests it is in the weekly index data for primary articles group and the fuel group — prices for which are mostly sourced from government departments — that the flow of price information is more irregular and hence, prone to frequent revision.

To complicate matters, the weekly index is issued with a lag of only two weeks, the upshot being more gaps in price data and thus prone to frequent revision later. In manufactures also, this problem is encountered but to a lesser extent. To place this issue in context, it may be added that, the combined total of commodities that figure in primary articles and fuel group number 151 with 652 quotations and manufactures include 555 items, with as many as 4,831 quotations.

The scale of effort involved in the compilation of the wholesale index is immense and when the weekly series suffer most from inadequate flow of price data, the underlying index too has limited utility.

It is this flaw that the contemplated change seeks to remedy. By making the task of compilation monthly, the collation of price quotes is made easier and there is enough leeway to go after these data should the sources delay them for one reason or another. In fact, the National Statistical Commission had opined that the response rate could improve if the wholesale price index is compiled monthly.

In a sense, the present dispensation — a weekly index for primary and fuel group of articles and a monthly index also incorporating the manufactures — was the outcome of the deliberations within the working group headed by Abhijit Sen that chalked out the modalities for the index with 2004-05 as the base. 

Monthly inflation stats makes sense
After dwelling the on the merits of a monthly index, somehow, it opted for a hybrid solution - weekly index for sensitive commodities and a monthly index with manufactures also forming a part of the general index.

This view found favour with the government too that it lost no time in implementing it from October 2009 even though the index was still compiled with the old base. All this is set to change soon.

However, some misgivings may be in order here. Wholesale price index is after all a producer price index which measures price changes at the wholesale level. How relevant is the inflation rate based on this index; it is not the case abroad and here the practice has become entrenched only because this index is available with a minimum time lag.

Moreover, the index does not include services where considerable sums are spent by households. What we need is a retail price index number compiled on the lines of the wholesale price index.

Fortunately, we are well placed now in this respect. 

The government has launched a new series of consumer price index numbers with 2010 base and covering both states and Union Territories and urban and rural areas.  This index made its debut in January 2011 and the January 2012 index is due to be out in February.

Thus, we are in a position to work out a truly all-India inflation rate -as well as for other constituents - by using the new CPI from this month and subsequent months on year-on-year basis. If so, the change to monthly WPI, though desirable on several grounds, may be a superfluity in so far as measuring real inflation rate - the price changes as experienced by the common man — is  concerned.