Govt to unveil consumer price index

In a relief to the common man, who finds no co-relation between official inflation figures and the actual cost of commodities, which keeps rising everyday, the Centre, will move to a more realistic and consumer centric index to calculate inflation from Tuesday.

The Consumer Price Index (CPI), which was introduced a year ago, will exist alongside the prevailing Wholesale Price Index (WPI), followed in India to gauge inflation.
CPI, which is followed in most of the developed countries, is said to be more reflective as it determines the extent to which retailers are likely to pass on any sustained increase in wholesale prices to the consumers.

The CPI will also reflect price movements in food, beverages and tobacco, fuel, housing, clothing, bedding, footwear and other goods. It will also track prices in the services sector, which constitutes about 60 per cent of India’s economy, but not included in the WPI.

“Globally, the CPI is the major indicator. However, in India it will take some time before the CPI replaces the WPI as the benchmark,” Standard Chartered Economist Anubhuti Sahay said.

The data for the index is collected from 310 cities and towns and over 1,180 rural centres.  The CPI, based on retail prices, stood at 113.9 points in December compared to 114.4 points in November, as per data released last month. It had taken the whole year of 2000 as the base with 100 points.

Meanwhile, inflation based on WPI was 6.55 per cent in January this year.

Basket broad-based
“In WPI, many commodities not consumed by the people get calculated in the index. In CPI, the basket is likely to be broad-based, reflecting people’s actual needs. It will also be based on consumer retail prices and that is why it is more realistic,” Mahesh C Purohit, Economist & Director, Foundation for Public Economics & Policy Research said, adding the index captures people’s cost of living inflation.

He, however, guarded against the higher inflation numbers reflected by CPI in the initial few months before it gets stabilised and woven into the price structure. But that will have an added benefit for consumers if the government uses the index to calculated dearness allowances for its employees, he said.

“CPI uses defined basket of goods and services that represents purchasing pattern of a particular household. Since this is driven from the consumption side, it provides a relatively realistic view on how consumers are affected,” Deloitte, Haskins & Sells Director Anis Chakravarty said.

Currently the government uses CPI for industrial workers to fix wages for the employees.
Analysts also expect the new index to benefit the policymakers in equal measure as it will provide the Reserve Bank of India another measure to assess rising cost.

The new index will be more reflective of demand-side price pressures faced by consumers, an important input for determining monetary policy. The RBI currently uses only WPI, which reflects prices felt by producers, to monitor inflation. Analysts say it is not fully reflective. Three CPIs — CPI AL (Agricultural Labourer), CPI RL (Rural Labourer)and CPI IW (Industrial Worker) are brought out in India. But, recently the Ministry of Statistics and Plan Implementation started working on two consumer price indices for rural and urban India with an aim to eventually merge them for the CPI-National.

The new index, which was introduced in February last year, uses 2010 as the base year. While introducing the index, country’s Chief Statistician T C A Anant had said that it will come into use from February 2012 alongside the WPI.

The WPI is necessary as it gives the correct picture of cost push inflation on the industry or the manufacturing sector, which is not reflected in CPI. Chakravarty said: “With CPI, inflation may increase or decrease depending on the dynamics of the economy. For example, WPI gives more weightage to fuel whereas CPI gives more weightage to food items.”

“Currently, prices of both goods are rising. Therefore if India switches to CPI variability will depend largely on these two components,” he said.