How hard can it be to figure out the cost of a cucumber? Quite hard, apparently. Reuters/Danish Siddiqui
Stubbornly
high inflation has for long beguiled Indian policy-makers. Now there’s
an added dilemma: The two main inflation indexes are painting different
pictures about price trends in the country.
Most
global central banks look at inflation in consumer prices to make their
interest-rate decisions. The Reserve Bank of India, by contrast, has
traditionally based its monetary policy on the wholesale price index
(WPI). But the WPI doesn’t capture movements in the prices of services,
which constitute close to 60% of India’s economic activity. So in 2011 the bank introduced a consumer price index (CPI) to better reflect household expenses. The idea was to eventually phase out the WPI.
For
now, though, the bank tracks both indices, and these are now throwing
out divergent data. Inflation measured according to the WPI increased in August to 6.1% from 5.8% in July. The CPI, however, fell to 9.5% from July’s 9.6% reading.
The
divergence was due mainly to differences in food prices in the two
indexes. According to the WPI, food-price inflation spiked to 18.2% last
month, while the CPI showed it declining to 11% over the same
period. Food represents half of the CPI basket, but only 14% of the WPI
index.
Pronob Sen, the government’s chief statistician, told the Times of India the
discrepancy is because food prices are calculated differently in the
two indexes. The CPI uses a weighted average between the market price
and the price in the public distribution system (PDS), a system of
state-run stores that sell basic essentials. The WPI, however, reflects
only market prices. ”The PDS price is constant so it tends to pull down
the CPI food inflation,” Sen said.
But
that explanation hasn’t convinced economists. In a research note,
analysts at State Bank of India, the country’s largest bank, wrote:
Experts say the way forward may be to shift the central bank’s inflation anchor from the WPI to the CPI. The new governor Raghuram Rajan, has already hinted that he may be in favor of speeding up the switch by announcing that the bank plans to issue bonds indexed to consumer prices, which would be aimed at retail investors.“This trend of WPI higher than CPI in respect of food items is intriguing and is a trend against normal price behavior and needs to be examined more carefully, as it may have some important policy ramifications.”