StatsGuru-23-July-12

Reserve Bank of India Governor Duvvuri Subbarao recently suggested that monetary policy needed to rely on price indices that went beyond consumer and wholesale prices. This is in advance of the monetary policy review on July 31. However, a look at the wholesale and consumer price indices, as in Table 1, shows that after a period of sharp divergence some years ago, they actually moved more or less in line until very recently.

That consumer price inflation has increased while wholesale price inflation has fallen could be due to the differing components of the two indices. As Table 2 shows, the currently used wholesale price index (WPI) gives almost a two-thirds weight to manufactured goods; primary goods, including food, are only 20 per cent. The consumer price index (CPI), on the other hand — decomposed in Table 3 — gives a much higher weight to food, almost half the index. Fuel is an additional fifth.

When inflation is driven by food and fuel — where cost pushes are beyond the control of monetary policy — the WPI and the CPI will obviously diverge. As Table 4 shows, it is indeed food inflation that has risen sharply of late, in anticipation of a poor monsoon. Meanwhile "core" inflation has shrunk sharply, indicating inflation is no longer generalised, according to Table 5. The pressure is on Subbarao, to cut rates.

As Table 6 shows, prices have decreased worldwide, though consumer prices less so than wholesale prices.(Clilck here for tables)

This accompanies a sharp slowdown in GDP across the world, as Table 7 reveals. (The exception to both rules: Indonesia, which has increasing inflation and growth.) But most banks have sharply cut rates of late, as Table 8 points out. How long will the Reserve Bank of India hold out?