Is WPI Inflation overstated and CPI understated?

While WPI has been rising for two months til August, CPI has been on decline for many months

Even as the Reserve Bank of India (RBI) has preferred tight monetary stance to arrest inflation, a confusing trend has emerged in the rate of price rise in recent months. This may throw up an interesting debate on whether RBI's monetary tools are apt to control inflation in such a complex scenario.

 

While the wholesale price index (WPI)-based inflation has been rising for two months till August, the consumer price index (CPI)-based inflation has been on the decline in many months.

 

This has come despite the fact that food inflation has been on the rise. Food items have higher weightage in CPI at over 45%, against over 24% in WPI (including both primary and manufactured food items).

 

WPI inflation rose from 5.16% in June to 5.79% in July and then to 6.10% in August. On the other hand, CPI inflation declined from 9.87% to 9.64% and further to 9.52% in the same period.

 

In WPI inflation, it was primarily food inflation that pushed the overall rate of price rise. It rose from 10.21% in June to 11.91% in July and then further to 18.18% in August. It should be noted here that when one says food inflation in WPI it relates to primary food items -- those found in raw form and not processed ones.

 

In fact, inflation in manufactured items within WPI has been declining steadily from 2.89% in June to 2.81% in July and then further to 1.90% in AUgust. Manufactured items have almost 65% weight in WPI.

 

Within manufactured items, inflation in food items also has been declining, in fact declining much faster than that in overall manufactured items. It fell from 6.41% in June to 5.04% in July and then to 1.70% in August. 

 

On the other hand, food inflation in CPI-based inflation declined from 11.84% in June to 11.7% in July and then further to 10.9% in August. 

 

"WPI inflation edged up significantly to 6.10% in August. The increase was primarily because of increase in food inflation to 18.2%. What is perplexing is that CPI edged down in August, which in normal circumstances should have increased, given the preponderance of weightage of food items in the same," Soumya Kanti Ghosh, chief economic adviser with State Bank of India said.

 

This trend of CPI higher than WPI in respect of food items is intriguing and needs to be examined more carefully, as it may have important policy ramifications, he said.

 

Official explanation given for the trend is that CPI contains PDS prices as well, which is not there in WPI. Hence CPI inflation fell in July and August while WPI rate of price rise increased, explained officials. 

 

However, PDS must have been factored in earlier months as well, which do not represent this trend, an expert said. 

 

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 like onions at cheaper prices  but that was limited to a few places only and restricted to a couple of farm produce, he said. 

 

In such an environment, when food inflation is becoming so complex, the RBI measures to check it through repo rate would not have much impact on the rate of price rise, the expert said. 

 

However, finance ministry officials explained that RBI measures are to check inflationary expectations, even as at the outset one may say that a rise in repo rate would not have impact on food inflation.

June, 2013	July, 2013	Aug, 2013
5.16%	5.79%	6.10%
CPI inflation year-on-year
June, 2013	July, 2013	Aug,2013
11.84%	11.70%	10.90%
WPI food inflation y-o-y
June, 2013	July, 2013	Aug, 2013
10.21%	11.91%	18.18%
CPI food inflation y-o-y
June, 2013	July, 2013	Aug, 2013
11.84%	11.70%	10.90%