ARE WPI AND CPI RIGHT TOOLS FOR MEASURING INFLATION?

By Ruma Dubey

The Wholesale Price Index (WPI) for May came in today at 4.7%, down for the fourth consecutive month and the marker once again went into a cheerful mood, upping its ante once again for RBI cutting rates. The memory of the market is shortlived as last month too, the WPI was down and retail inflation, CPI remained high at over 9%. And this high retail inflation was the reason why RBI did not go for an aggressive rate cut.

The moment inflation numbers come in, everyone expects RBI, not the Govt, to react. How can RBI alone control prices when there are such huge supply bottlenecks? The rotting grains in godowns reflect precisely this flawed process of food distribution. And how can RBI alone correct this logistical nightmare?

Last week, we had looked at the efficacy of using either IIP or PMI to evaluate growth rate. And this week, looking at the major gap between CPI and WPI, it becomes imperative to assess which is more effective tool for measuring inflation, after all these are the numbers which are used by RBI to either reduce or increase rates.

Last year, around the same time, RBI Governor, Dr D. Subbarao, had stated that the present structure of measuring inflation did not capture the price movement of services and was a hybrid of rate quotes. He had proposed the Producer Price Index (PPI) which he advocated is a better indication of prices as it measures the average change over time in the sales price of domestic goods and services.

PPI is often confused with the WPI but that is only because it was earlier labeled as WPI but over a period of time, it is has become apparent that they are two different indices. In simple language, PPI measures the price that producers initially receive for goods and services. It is the purchasing price of the producer, the price of manufactured items at the factory-gate not including taxes, trade margins and transport costs. WPI on other hand, is the measure of price of manufactured goods but does not measure services. It was originally supposed to measure the price at the factory gate, which is what PPI does but it now more a measure of prices at the wholesale mandis. It includes a basket of 676 commodities, covering onions to chemicals and capital equipments.

CPI tracks retail prices paid by consumers for finished products. There is a major difference between the WPI and the CPI as the prices differ due to subsidies, sales tax, excise duties, distribution costs. In that sense PPI is more like core inflation as it is more stable. It usually excludes food and fuel prices from the basket of household spending as they both tend to be very volatile and if this volatility is passed on to the consumer, then it becomes difficult to access the core inflation.

PPI is mainly used to measure the growth of output and CPI is used to adjust income and expenditure or measure cost of living. PPI also usually published monthly will give us the right indication of the core inflation, the best tool while making policy decisions. With 55% of the GDP basket coming from services, with WPI not measuring services and CPI being more volatile, PPI in that sense gives us a steady and more reliable measure of inflation. PPI should replace WPI which somehow today, is neither a PPI nor a CPI, a khichadi or sorts on which policy decisions are based.

If we can have PPI and CPI as the two measures of inflation, that in a sense, will give policy makers a much better picture.

The moot question remains – will RBI reduce rates next week? Unlikely and frankly, RBI has used the entire arsenal in its armour; it is time for the Govt to wake up or else we all could be living a nightmare.