Chaos: A tale of 4 inflation rates

These are inflationary times. Daily encounters at the market place confirm this, contradicting the official line that the price situation has taken a benign turn.

True, the wholesale price index or WPI-based inflation rates for June and July are negative, having declined by 1.14% and 1.38% compared with their respective year-ago levels.

But at the retail level, the story is diametrically opposite. The inflation rate, using the consumer price index for industrial workers, has accelerated to 9.29% in June from 8.63% in the preceding month and has soared past the double-digit mark to stand at 11.89% in July.

In rural India, the price fever is raging even more fiercely, with the consumer index for agricultural labourers up by 11.52% in June and further to 12.90% in July; the same upward movement is seen in the similar index for rural labourers.

Thus, out of the four inflation rates, three have scaled a new high in recent period, even as the one, linked to the WPI, pursues a downward path during the same period.
There is another index for the so-called executives and management personnel of the organised workforce — the consumer price index for urban non-manual employees.

This index is available only for June 2009 and it ironically showed a spurt of only 9.58%, a rate far less than what the most vulnerable segments of the population have to contend with.

Leaving this index out of consideration, from the four indices, the picture that emerges is that the WPI is the least reliable barometer of the price behaviour.

The method of computing the inflation rate, using the index for the latest week and comparing it with the same week of the previous year also appears to be flawed. The indices during the intervening weeks are ignored and the weighting diagram is tilted heavily in favour of manufactures.

Even applying the same yardstick, the four consumer price indices reveal that, far from being subdued, the beast of inflation is running amuck. Simply put, inflation rate is not negative but in double digits.

Moreover, this practice of point-to-point determination of inflation rate may have some validity in the past when prices see a dip in the post-harvest months; now, with the government setting the minimum support prices for a host of commodities, seasonality is conspicuous by its absence as officially fixed prices serve as a benchmark for the open market as well.

Let us examine the alternative approaches to measuring inflation - the sequential method where the inflation rate is derived for the latest index by comparing it with the preceding one, and another methodology where the March index serves as the basis of comparison.
Sequentially analysed, even in regard to the WPI, instead of a negative rate of inflation thrown up  by the point-to-point method, there is in fact an opposite movement. In June, the WPI rose by 0.17% and this accelerated to 0.85% in July.

When it comes to the retail indices, the trend is indeed disconcerting; CPI-IW was up by a whopping 4.58% in July which was on top of an increase of 1.32% in June. CPI-AL had galloped from 1.89% to 3.10% during these months and the CPI-RL from 1.89% to 2.89%. On an annual basis, the spurt could be very high indeed.

On a fiscal year basis where the March figure is the base - this remains constant unlike in the point-to-point approach where the base goes on changing - the cumulative inflation rates for July are 3.72%, 8.11%, 7.78% and 7.33%, respectively, for WPI,CPI-IW, CPI-AL and CPI-RL.

These in turn yield a monthly average inflation rate of 0.93% for July as against 0.95% for June for WPI, of 2.03% as against 1.13% for CPI-IW, of 1.95% as against 1.51% for CPI-AL and of 1.83%  as against 1.44% for CPI-RL. Three inferences can be drawn from the chaotic state that prevails in regard to inflation measurement.

One, WPI needs to be jettisoned in favour of a comprehensive retail price index, calculated on a monthly basis.

Second, the point-to-point comparison is no longer relevant as seasonal element is missing in price behaviour and more so because the indices for the intervening weeks are ignored.

Third, till a retail price index is ready, the WPI must be issued monthly —- in most countries, price indices are worked out from month to month —- rather than weekly, even though these indices may be compiled in-house each week and at the end of the final week, aggregated to derive the index for the month in question.

In a word, the present arrangement is unsatisfactory as the index is faulty and the inflation rate calculation too is faulty.