Complicated inflation data raises doubt on RBI action

In what may lead to a debate on whether the central bank has the required tools to control inflation, a confusing trend has been seen on the inflation front in recent months. While Wholesale Price Index (WPI)-based inflation rose during the two months ended August, Consumer Price Index (CPI)-based inflation was on the decline during the same period.

WPI inflation rose from 5.16 per cent in June to 5.79 per cent in July and, subsequently, to 6.1 per cent in August. On the other hand, CPI inflation declined from 9.87 per cent to 9.64 per cent and finally to 9.52 per cent in the same months.

This was despite the fact that food inflation has been on the rise. At about 45 per cent, food items have higher weightage in the CPI, against 24 per cent in the WPI (including both primary and manufactured food items).

In WPI inflation, it was primarily food inflation that pushed up the index, rising from 10.21 per cent in June to 11.91 per cent in July to 18.18 per cent in August. In the WPI, food inflation pertains to primary food items (in raw form, not processed).

Inflation for manufactured items within WPI has been declining steadily---from 2.89 per cent in June to 2.81 per cent in July and to 1.9 per cent in August. Manufactured items have weightage of about 65% in WPI. Within manufactured items, inflation for food items has also been declining, and the fall was steeper than for overall manufactured items. It fell from 6.41 per cent in June to 5.04 per cent in July and to 1.7 per cent in August.

On the other hand, the price rise of food items in CPI-based inflation declined from 11.84 per cent in June to 11.7 per cent in July and to 10.9 per cent in August.

“WPI inflation edged up significantly to 6.1 per cent in August. The increase was primarily because of increase in food inflation to 18.2 per cent. What is perplexing is CPI edged down in August. Under normal circumstances, it should have increased, given the preponderance of weightage of food items in it,” said Soumya Kanti Ghosh, chief economic advisor, State Bank of India. He added the trend of a higher CPI, in terms of food items, was intriguing and should be examined carefully, as this might have important policy ramifications.

The official explanation of the trend is CPI accounts for Public Distribution System (PDS) prices, too, which weren’t there in WPI. An expert, however, said though PDS must have been accounted for in past months as well, this trend wasn’t seen earlier. Besides, PDS prices would not lead to fall in CPI inflation unless the government was aggressive in price control. The government did sell some products such as onions at cheaper prices, but this was limited to a few places a couple of farm products, he said.

In such an environment, when food inflation was turning complex, RBI measures to check it through a repo rate rise wouldn’t have much impact, the expert said.

Finance ministry officials, however, said the RBI measures were aimed at checking inflationary expectations.