Friday, May 15, 2009

WHICH INDEX SHOULD MATTER MORE FOR INFLATION TRACKING - CPI OR WPI?

In a country where elections are won and lost on the issue of price rise , it is ironical that most of the economists and also the media focuses on Wholesale Price Index and not the Consumer Price Index. The inflation , in India, is tracked by measuring the percentage change in WPI index over same period a year back. This denotes the price change in the goods and services comprising the wholesale price index. In my opinion, while WPI is an effective indicator of inflation in the economy, it does not fully represent the inflationary pressures facing the common man on the street. Why is it so? This is because the rate of change in WPI and CPI index can vary a great deal. While the WPI in India is currently at 0.4% , the CPI is pegged at well over 9%. This means while , the whole country is looking at WPI index and thinking that the rate of price rise is only 0.4%, the same is not true for the common man on the street. He still has to pay 9% more for buying the same goods and services over last year's price. So should we not look at CPI more closely and should we not give it more importance. The answer is Yes. In fact RBI does give CPI due importance , but, more needs to be done.The political parties too don't seem to understand this. Congress party launched a campaign in the last election where they took credit for fall in prices. Firstly, fall in inflation means fall in the rate of increase in prices and not an actual fall in prices. These are two very different things. Secondly, they were referring to WPI index and not the CPI, while the voter who votes is concerned with the rate of inflation in CPI and not in WPI.CPI gives the real picture of the inflationary pressure or stress being faced by the common man and as such needs to given little more weightage.

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