A revised method of compiling data under Wholesale Price Index should capture price rise realistically.
The weekly index of food prices rose 19.05 per cent in the week ended November 28 as compared to the same period last year. There has been a relentless increase in food prices this year: during the third week of November, food inflation was at 17.47 per cent. Disconcerting as these numbers are, they might not have acquired a sharp edge if the government had not made major changes in the way it announces inflation data.
The government has altered the calendar for releasing the inflation data since the middle of October. The WPI (wholesale price index)-based inflation that was released till then at weekly intervals will now be made available once a month. The data on prices of primary articles and commodities - food and fuel inflation at the wholesale level - are however made available on a weekly basis. These data, when buried in the WPI index, did not immediately reveal the extent of price rise even at the wholesale level.
Shortcomings of WPI
There are a number of reasons for this changeover. The weekly WPI inflation data were not adequate for monetary policy purposes. Central banks the world over have been relying on a representative consumer price index for policy purposes.
In India, there has been a multiplicity of indices - four consumer price indices (CPI) focussed on particular sections at monthly intervals and the weekly WPI, now withdrawn.
The Reserve Bank of India has for long argued for harmonising the various indices. One of the main points of criticism of the weekly WPI was that it tended to obfuscate rather than clarify the price situation. Inflation is the rate of increase in the prices of a chosen basket of goods over a corresponding period a year ago.
For some months now, the WPI inflation has been hovering at very low levels and was in negative territory for a short period. This hardly jelled with the high prices consumers had to pay for most food items. In fact official statistics started losing credibility even as inflation expectations - the belief that prices would remain high - hardened.
Official explanations have not convinced the common man about the validity of data. Only the economists know that the abnormally low inflation is mainly due to the "base effect,'' a statistical aberration; or that the high prices of food articles are not reflected in the WPI because of the low weight given to primary articles (22 per cent) in the overall index. Thus, even when food prices were going up, the official WPI remained benign because of the offsetting effect of the much lower price rise in manufactured items, fuel and power.
In contrast, the consumer price indices have remained stubbornly high, either above or only slightly below 10 per cent. They capture the price rise in food articles more realistically than the WPI. That is because the food group is accorded a much higher weight in CPI than in WPI. For instance, in the CPI-AL (Agricultural Labourers), the food group has a 69.2 per cent weight and in the CPI-RL (Rural Labourers) 66.8 per cent.
Hence the new system of reporting only food and fuel inflation at weekly intervals and WPI inflation at monthly intervals has in a sense infused a measure of transparency and made government statistics more credible. For instance, on November 5, inflation in primary articles was 8.94 per cent while food items were up by 13.94 per cent. Under the old system, these would have been buried in the very low WPI figures. Certain other practical reasons were cited to justify the new calendar. It was difficult to capture manufacturing and certain other data at weekly intervals.
A longer time span of a month would help the government compile more authentic and up-to-date price data without having to repeat the previous week's figures.
Finally, the weekly release leads to increased volatility in the financial markets. However, markets can and do speculate on the basis of asset price movements without waiting for official data on inflation numbers or any other.
A policy aid
The new arrangement of announcing primary inflation at weekly intervals and the WPI at monthly intervals has a contextual significance. Since the elevated food prices can no longer be camouflaged in the weekly WPI, policy makers are forced to act. There is considerable debate going on now whether the food inflation brought about predominantly by supply side factors will be amenable to monetary measures.
In the context of the interest rate policy, the RBI may be guided by a number of considerations including the elevated food inflation. After all, persistently high food prices, now dramatically corroborated by the weekly data, will reinforce inflation expectations.
These are likely to aggravate demand side factors through, for instance, a clamour for wage increases.
It is quite likely that the inflation calendar will be further reviewed and reworked. A case has been made for reintroducing the weekly WPI, after improving the data collection.
In vogue since 1942, the WPI has had certain benefits. It can give a true picture of the economy at short intervals, a very useful tool in a situation where several lead indicators such as unemployment rate and capacity utilisation are absent.