Are prices easing? The index sure says so

To consumers worried about the high prices of essentials, Tuesday’s news that inflation has dropped by 1% in August to 8.5% would seem like a cruel joke. More so, when they learn that the drop was the result of a change in the way the wholesale prices index (WPI) is calculated. The old WPI has been replaced by a new one with 2004-05 as the base year, and the main change is a reduction in the weightage given to food prices in the new index.

If this sounds like tampering with reality to get politically correct results, perish the thought. The new WPI is well thought out, and is wider and deeper than the old one, reflecting changes in
consumption patterns. While high food prices have been the bane of the last two years, overall — as the country grows richer — the wallet share of food in the urban consumer’s list of purchases should be falling. In short, the new index is more robust and closer to reality.

The new index reflects urban consumption trends better, covering 676 items against the 435 tracked in the old WPI. The price quotes used are 5,842, up three-fold from 1,918 earlier. The new series will cover products like TV sets, refrigerators, readymade and instant foods, mineral water, telephone instruments, gold, silver, et al. The weightage assigned to different categories of products has changed: primary articles (including food) in the WPI will come down to 20.11% compared to the previous 22.02%, while manufactured products will be nearly 65% against the earlier 63.74%. Fuel and power gets weighted at 14.91% (14.22% earlier).

From an economist’s point of view, the new WPI seems more inclusive of items that modern Indians, whether rich, middle-class, or even lower middle-class, are likely to buy. For instance, refrigerators and TV sets can today be found in virtually all homes. Almost every other Indian today owns a mobile, and this includes the poor, for whom the mobile is a means to earning a livelihood.

Whether this new WPI will make the inflation rate go up or down is difficult to gauge at this stage, especially since inflation in moving from food to manufactured items. But what it will do is reflect the inflation rate far better in the years ahead. Of course, the common man is more directly affected by the CPI (consumer price index) than the WPI, and that’s where the big changes must be made to reflect current consumption patterns.