It is not possible to capture inflation details with one set of numbers, howsoever wide it may be in terms of coverage. Fighting inflation also requires homework from each individual, which needs gauging of inflation at the individual level
When the WPI (wholesale price index) inflation data came out on 14th May, the news spread like wildfire all over the media. The more-than-expected fall in WPI number created a sense of euphoria in the market and made some people jump to the conclusion that the war against inflation has finally been won. After all, WPI at 4.89% for April was the lowest number that WPI had touched post November 2009. But what does this fall in inflation depicted by WPI mean for a common man? Has the rate of increase in prices of goods and services used by him indeed fallen or is it more of a data?
Just two days back another inflation number was published known as Consumer Price Index (CPI) which was at 9.39% for the month of April. But the story does not end here as far as inflation data is concerned. The Reserve Bank of India (RBI) often says that we are concerned more about “core inflation” than WPI, also called as headline inflation. So which is the most reliable indicator of inflation in India and which number should a common man believe in? Let us look at the analysis of these inflation numbers and significance of the same for the common man.
Core Inflation: Core inflation is the inflation used by RBI for policymaking decisions. Since March 2010, the RBI has been using non-food manufacturing inflation as a core inflation measure for India. Core inflation is computed by excluding the prices of primary articles, fuel group and processed food from the WPI. However, the RBI Governor himself has spoken against this measure of inflation. He has mentioned that food and fuel together constitute 65% of the consumption basket practically and hence core inflation ignores this aspect of inflation in India. He has also vouched for moving to Producer Price Index (PPI). However, the fact remains that core inflation number impacts interest rate policy in India. As far as common man is concerned the impact of core inflation matters more when you are leveraged. The fall in core inflation may not have an immediate impact on a common individual.
Wholesale Price Index: Popularly called as WPI and also referred as headline inflation, as the name suggests it measures the trend in wholesale prices across various heads of primary articles, fuel & power and manufactured products. The current series for WPI has a base year of 2004-05. The weightage given to primary articles is close to 20%, while fuel and power has weightage of approximately 15%, rest 65% weightage has been assigned to manufactured products. Though this index broadly covers the inflation across different segments of the economy, it is manufacturing based. Also being a wholesale price index, an individual consumer may not be a direct and immediate beneficiary of a fall in the inflation number.
Data collection issue still exists and the flow of data is not timely. The WPI doesn’t take the price of services into consideration, which now accounts for 60% of the GDP (gross domestic product). Also, it is too general and cannot be used for specific purposes. Basically WPI is not a true reflection of inflation for a common man. However, in spite of having lacunae it is still used for policymaking. For a common man, a fall in WPI does not warrant immediate celebration. The trickle-down effect takes time to work.
Consumer Price Index: Consumer Price Index (CPI) is probably the fairest measurement of inflation for a common man in India. It won’t be wrong to say that this number shows the inflation that an individual has to, by and large, face. CPI is designed to measure changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes. There is a marginal representation of services sector in India. This number is also used by the government to grant dearness allowance (DA) to its employees. Though published separately for industrial and agricultural workers, the number has fair representation for food and beverages, fuel and light, housing, etc. Even medical care expenses are covered here.
The fact remains that it is not possible to capture inflation details with one set of numbers, howsoever wide it may be in terms of coverage. Often we complain that the falling inflation number has no substantial impact on our life. This happens because of different consumption patterns that many of us have with these inflation indexes. Fighting inflation also requires homework from each individual which requires gauging of inflation at the individual level. However, looking at CPI numbers at least we can come to the conclusion that inflation is not less than what this index depicts.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)