The three sets of macroeconomic data released last week lend themselves to multiple interpretations. Two of them relate to inflation. Consumer price inflation (CPI) data for April were released on May 12, while news of inflation based on the wholesale price index (WPI) for the same month came in on May 15. Also, at the beginning of that week, the government released the monthly data on industrial output as measured by the index of industrial production (IIP). These were the last important macroeconomic data releases of the UPA regime and they came in just ahead of the election results. For that reason alone, they were hardly routine. Each of them gave an updated picture of two of the major macroeconomic concerns — price rise and falling industrial production. Obviously, these concerns would have substantially influenced the election results. The new government faces daunting challenges. CPI inflation for April was at a three-month high of 8.59 per cent on a year-on-year basis as compared to 8.31 per cent in March. The news on WPI inflation was slightly better. It rose at a lower-than-expected 5.20 per cent in April, the lowest in three months. In contrast, the WPI for March was 5.70 per cent, a three-month high. Analysing the WPI and CPI data it is apparent that varying levels of food inflation influenced the indices, but curiously, in opposite ways. This is because of the differing weights accorded to food prices in the two indices.

WPI inflation is lower because of a moderation in vegetable, especially onion, prices since March. However, as far as CPI inflation is concerned, it is once again a case of food prices driving up the general price level. Whatever be the technical explanation, the common man cannot be easily convinced of a fall in food prices, and hence inflation. Indeed the CPI, which has recently become the main reference point for monetary policy, is what determines inflation expectations. From that standpoint, the persistently high consumer inflation does not augur well for an interest rate cut by the Reserve Bank of India when it reviews the credit policy early in June. Indeed, the RBI’s task of striking a balance between price stability and providing for the credit needs of the real economy has become that much more acute. The index of industrial production for March 2014 was 0.5 per cent lower over the figure for last year, completing a year of stagnation in the industrial sector. But reviving industry through a soft interest rate policy is not going to be easy as long as inflation remains above the RBI’s comfort zone. Supply side measures to cool inflation need to be undertaken by the new government with utmost priority.

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