Tracking prices

The Reserve Bank governor D Subbarao’s proposal that the country should develop a Producer Price Index (PPI) which will reflect price movements at the producers’ level needs to be seriously considered. Inflation has been a major concern with the apex bank and it has taken steps to curb it through interest rate changes and other policy interventions.

But the instruments to measure price changes are not the best and do not always give a faithful picture. The two important indices available now are the consumer price index (CPI), which measures inflation at the retail level for the consumer, and the wholesale price index (WPI).  A new CPI series was introduced earlier this year but this in itself is not adequate in measuring inflationary trends.

The wholesale price index is a combination of consumer and producer prices but does not reflect the prices that prevail at the producers’ end which is the first and most basic level.

Since WPI is the price at the wholesale market it includes the cost of transport of goods from the producers’ point to the wholesale point and the taxes in the case of some items. It reflects a selling price and does not show what the  manufacturing or producing cost of a commodity is. A Producer Price Index (PPI) would give a good base to compare the final price of a commodity with what it was when it was produced. CPI serves as a good cost of living index. A PPI will help to show all the elements that go into the CPI and give an idea of how it gets inflated on the way from the producer to the consumer.

The difference between the PPI and the CPI will give a good idea of distribution costs and the profit margins of intermediaries. The RBI governor feels that it is sometimes difficult to interpret the overall price trend with the available measures and the proposed index will give more clarity.

When the economy becomes more complex and economic activities expand trends of factors like  production volumes, market arrivals and prices at various levels need to be tracked effectively for policy formulation.

Economically developed countries have producer price indices, though the system of computing the index varies from country to country. The government should follow up the proposal made by the RBI governor and work towards creating a PPI which will give a better understanding of the structure and movement of prices.