Inflation dips to 8.5% under new base

Headline inflation rate, as measured by the Wholesale Price Index (WPI) with a revised base of 2004-05, decelerated to 8.5 per cent in August, primarily due to fall in prices of primary articles, compared to 9.8 per cent in the previous month.

There is, however, a one percentage point difference between inflation based on the new base, and as measured by the old base (1993-94), was estimated at 9.5 per cent, compared to 9.97 per cent in July. The magnitude of decrease is also higher in case of the new series — 1.3 percentage points — compared to 50 basis points under the earlier series.

Going by the revised base, the inflation for all groups — primary, manufactured and fuel — showed a deceleration in August. In case of primary products, inflation moderated to 15.8 per cent from 18.9 per cent in July led mainly by food articles. The fuel index moderated to 12.5 per cent from 13.3 per cent in July. In case of manufactured products, the inflation rate moderated to 4.8 per cent in August from 5.4 per cent a month ago. The data for non-food manufactured products also moderated to 5 per cent from 5.4 per cent a month ago.

Compared to the old series, inflation for fuel and manufactured products is lower under the new series. In case of primary articles, inflation based on the new series was estimated at 15.8 per cent, compared to 15.4 per cent in the old series.

This was mainly due to food inflation, which was estimated at 14.6 per cent in the new series and 11.1 per cent in old series, though there is a moderation compared to July, irrespective of the base used.

“It is relevant to note here that food prices tabulated in the primary article index are likely to be estimated at procurement prices in the new index instead of the old method of valuation at issue prices. Procurement prices have been moving higher over the past few months and this has been reflected in the different food inflation readings in the old and new indices,” HDFC Bank Chief Economist Abheek Barua said in a report.

Apart from the new base, there are other changes that have been incorporated. To start with, the weights have been lowered for primary articles and food products.

Base revision for WPI is usually done once in every 10 years. This is the fifth such revision. Revisions of base effect entail a shift of the reference year, change in basket of commodities and assigning new weights to commodities.

The change in the series has also prompted economists to lower their projections. For instance, Barua is now forecasting inflation of 5.5 per cent in December, compared to 6.5-6.8, projected earlier. For March-end, he has lowered his forecast by a percentage point to 5 per cent.

Finance Minister Pranab Mukherjee also said that inflationary pressures remained and the Reserve Bank of India and the government would take appropriate measures at the appropriate time. “I hope that annual inflation would be much lower and it will be much below in the new series,” he said in a statement.