A better measurement of inflations

Mon, 21 May Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Inflation is something which affects everyone. Everybody, irrespective of his/her knowledge on financial data, seems to have some view on inflation. And why not, it measures a sustained change (increase) in the general level of prices of goods and services in the economy which affects everyone. Hence, the method followed to measure inflation becomes very critical. However, India seems to be lagging behind when it comes to be measuring this critical number.

Inflation is basically calculated based on Wholesale Price Index (WPI) or Consumer Price Index (CPI). A lot of debate is already done on the issue- which one is a better way to take into account. And, CPI-based measurement seems to be a clear edge over WPI-based method. There are many good points attached with CPI. First, CPI accounts the prices of goods and services purchased by the end consumers. Hence, it reflects the actual cost of living. Whereas WPI, take the wholesale price into consideration, that too for goods only. Then, there are many insignificant commodities in the WPI index. However, CPI has well selected elementary items. In addition, CPI takes into account the regional as well as rural and urban consumption patterns while arriving at weightage given to different items. Hence, it has got more precise and wider scope to paint the true picture of inflation.

A very few countries use WPI-based inflation. And India is still one of them. Many countries have already shifted to CPI. And, India is also on the track to follow the suit. It has started CPI-based index in Feb 2011. Since then more than a year passed. Hence, now policy makers are having more data. Considering all this, Reserve Bank Of India (RBI) has started taking notice of new inflation numbers based on CPI.

Well, then why so many countries still use WPI? One obvious reason is that it is easier to collect data for Wholesale price of goods. Besides, once a country start following a way, it is difficult to change due to lack of historical data in case of shifting to other method. Naturally, it would take another 4-5 years in building up the data. Then only, any meaningful and analytical insight can be developed from the new CPI-based inflation numbers.

The effort towards shifting to CPI- based inflations is definitely a welcome move. However, CPI-based calculation needs a fast pool of data. The Indian government seems to be taking the right steps in this regard. The Ministry of Statistics and Programme Implementation (Mospi) has been training people responsible for data collection.

How much it would help reflect the true economic picture and frame different government policies. At this point in time, we can only say - still, a long way to go.