Inflation… Probably the most haunted word, for both, households and the policy makers. It is equally haunting for the readers/students of economy and business..! The latest figure for inflation for March’16, based on Wholesale Price Index (WPI) shows a decline of 0.85%. The inflation has been in the negative zone for more than a year now being as low as -5% in Aug’15. While this means that on an aggregate basis, prices are coming down, it looks contrary to the general perception. So, why is that so?? The riddle is partly solved by Consumer price Index (CPI) based inflation. Even though WPI is negative, CPI inflation has been in the range of about 4-5 % over the past 12 months. The last figure for March’16 was 4.83%, slight moderation over Feb’16 of 5.26%. And this is actually an improvement over the previous year when this inflation was closer to 8%.

So, what drives the two number so differently?? WPI, as the name suggest, actually takes an aggregate view of the economy and is arrived after calculating the price pattern of nearly 800 items (!), including prices of manufacturing sector, grouped as manufactured products. In fact, manufactured group, based on its contribution to the GDP, accounts for nearly 65% of weight in calculation of inflation. Other than that, Food articles and Fuel & power account for nearly 15% weight each.

However, in case of CPI which captures the prices affecting the consumers , the weightage is substantially different.  The weight of Food & Beverages stands at about 45%, based on the average spend on these items. In fact, CPI is further calculated separately for Urban and Rural since the consumption pattern differ significantly across the two regions. Weight for F&B is 54% for rural and only 36% for urban CPI. Fuel & light, having a weight of 15% in WPI has a lower weight of about 7% only in CPI.

It is this basic difference which is driving the two inflation rates differently. CPI continues to get weighed down by food prices, which have not seen a decline, barring a few items. And since its weight is very low in WPI, it is not making any impact since fuel & power and manufactured products have declined sharply. Manufactured products are, in turn, getting the benefit of lower commodity prices.

It may be noted that until about two years back, WPI used to be the reference inflation rate for  RBI key policy decisions. CPI was adopted as the key measure as per the recommendation of a committee set up for this. This means, the RBI monetary policies, aimed at controlling money supply, and in tun, inflation would be driven based on the CPI, which affects the common man, rather than WPI.

Had WPI been the reference rate even now, swords would have come out for the head of Dr Rajan…!

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