Hopefully reliable

Hopefully reliable

The new series of consumer price index (CPI), compiled and released by the government, is welcome as it provides a better and more realistic measure of price changes.

The index came into operation last week. There  are a number of advantages for the new system compared to the earlier one of measuring price movements with the wholesale price index (WPI). Most countries use the CPI as a reliable indicator of inflation. India, which was among the few to employ the WPI for the purpose, planned a transition for a long time but it is only now it has finally done that. With the expansion of the economy and the surge in consumption the case for a reliable index had become strong and self-evident. 

The new index is more broad-based and, importantly, captures prices at the retail level and not at the producers’ end. Some of the elements in the WPI were not relevant to the common consumer. What matters to the common people is the price at which they buy goods and services, and not the wholesale price. The retail prices are always higher than the wholesale price.

The new index also has a wider coverage. Till now the CPI covered only the consumption of rural, agricultural and industrial  workers. The new index covers more sections and brings in services which form more than 50 per cent of the economy. Components like housing and education, which are important, now have a place in the index. Weightage assigned to items has also changed according to the changes which have taken place in the consumption pattern. The index is also based on price quotes from more collection centres and this will make it more representative and true.

Availability of correct and reliable data is important for policy-making. It will also help students, researchers and others who monitor the economy. Even though there is a more efficient tool to measure inflation now, data collection processes have to be improved.

The methods should be more efficient and it must be ensured that data is collected carefully and rigorously. The effect of the new index is revealing. According to it, inflation for the month of January was 7.65 per cent as against 6.55 per cent indicated by the WPI. That takes a cheer away but affirms the hope that the index will reflect the ground reality better.