Reset gauge pins retail inflation at 7.65% vs 6.55% WPI in Jan

Breaking with the long-established tradition of measuring inflation using the wholesale price index, the government has come out with a new consumer price index a year ago to gauge the general price movements where it matters — the common man — and with the data for January 2012 in the public domain, the point-to-point rise in prices for this month works out to 7.65%.

For rural India, the annual spurt is of the order of 7.38% and for the urban population, it stood at 8.25%, yielding a composite rate which is higher than the overall increase of 6.55% based on the wholesale price index.

The new inflation data has served to confirm what is already known, namely, the trend of moderation in the price fever in the economy of late.

But, what lends significance to this new consumer price index-based inflation is that, we have adopted the global practice by initiating a process to dethrone WPI as benchmark inflation and also to take recourse to monthly basis for compilation for the index which, while making it more reliable, will be released with a time lag of about three weeks.

Moreover, with the inclusion of services and a weighing diagram in which nearly 50% is accounted for by food and related items, the retail index is more apposite than wholesale index to capture price movements more realistically.

The first set of data on inflation with the consumer price index contains quite a few surprises. Though in January 2012, rural inflation has trailed behind urban inflation, the extent of the price rise in cereals, at 3.44%, is higher than in urban India (0.79%). This situation has prevailed for eggs, fish and meat, milk and products and sugar etc. On the other hand, the extent of the decline in vegetables is less in rural areas than in urban segment while for many of the commodities, both rural and urban population are impacted by the spiralling prices to a more or less similar degree.

Another noteworthy feature is that, during January, single-digit inflation is mainly due to the food group as the other two majors  - fuel & power and clothing, bedding & footwear - are victims of high inflation, whether in rural or urban India. And between rural and urban populations, the rate of inflation in these two groups is of a similar magnitude.

Interestingly, based on the retail index, the inflation rate in January was the lowest at 1.2% in Dadra & Nagar Haveli; even in Orissa and Andhra Pradesh, two major states, the price rise was very subdued and well below the national average of 7.65%. In contrast, Meghalaya had to contend with a high inflation rate of 18.7%, while in Karnataka, it was a whisker below 10%.

For reasons not clear, the complete groupwise indices for January 2012 are not published. Details relating to food, fuel and clothing groupings are furnished but no data are given in respect of housing and miscellaneous groups which between them command a weight of 36%. There is no way determining the price changes in respect of such items as education, medical care and transport & communications.

In all, the new series with 2010 as base, covers 35 states and Union Territories, though effectively the coverage is limited to 34 of these as for one state- Arunachal Pradesh - updated information is not available. For all these regions, the index is compiled separately for rural and urban population and a composite index is then arrived at. Thus, for the first time, we have retail indices for each of the states and Union Territories with a break-up for rural and urban population.

Effectively, therefore, the new series may revolutionise the way the inflation rate has been measured hitherto by jettisoning the WPI which actually is a producer price index and the three other indices - consumer price index for industrial workers, another for agricultural labour and a third for rural labour.

Thus, we have a welter of indices to measure changes in  the general price level but all of them suffer from many inherent limitations. Also, till now, we had consumer price indices for urban and rural centres but not for the state or Union Territory as such or for rural and urban population separately or for all-India as a whole.

The pity is that it took so long a time to construct a retail price index on the above lines. This delay is regrettable because, of all the economic indicators, inflation rate - whether it moves up or down - impacts the daily lives of the common man. For the purposes of monetary policy where demand -side management is crucial by using the variety of tools at the hands of the central bank, a right clue to price behaviour is important. Hopefully, the new consumer price index will serve as a reliable barometer of price movements in the economy.