Unprecedented spike in inflation spurs calls for urgent data revision

An unexpected acceleration in India’s inflation in the last two months has reignited debate on data collection practices that ignore changes in the economy and rely on obsolete items for collecting prices.

Consumer prices rose 6.44% in February, breaching the Reserve Bank of India’s target ceiling as well as analysts’ expectations for a second straight month. That has boosted the chances of another rate increase in April.

Economists are worried the RBI’s rate decision would be based on a number that doesn’t fully reflect digitalization of the economy, possibly leading to a policy misstep. This adds to concerns around quality of India’s data that has often been questioned in the recent years for being inadequate and delayed.  

“Much of the data collated for inflation calculation has innate structural issues, distorting the figures by over reliance on select non-essential parts,” said Soumya Kanti Ghosh, Chief Economic Adviser with the State Bank of India. It doesn’t take into account rising share of locally-made smartphones and online shopping at steeply discounted prices, he said. 

Urgent Revision
 

A revision of items in the inflation basket and the base year — India is still using 2012 as the reference year for comparing prices —  has become overdue as the government suspended field surveys during the pandemic. The latest confusion comes on the pace of increase in cereal prices which isn’t in sync with the overall print.

Economists are clamoring for an urgent revision in the data. Inconsistency in inflation measurement may prove to be costly for the economy by prompting the central bank to keep borrowing costs higher for longer. The anomaly is also seen in factory output that doesn’t capture the changing landscape such as production of iPhones and solar panels.

“If taken at face value by the RBI, higher CPI readings risk tipping the balance toward more aggressive hiking. This would be a mistake,” said Bloomberg Economics’ Abhishek Gupta. “For policy makers to get a better handle on the world’s fifth-largest economy, there needs to be an urgent overhaul of its data standards.”

Meanwhile, wholesale prices rose less-than estimated at 3.85% in February, continuing the divergence with retail inflation due to lower commodity prices, data released Tuesday showed. Benchmark 10-year yields dropped as much as four basis points to 7.3%, tracking the rise in US Treasuries spurred by bets for slower Federal Reserve hikes.