Behind Inflation figures

WHEN the wholesale price index (WPI) had eased to arround 0 % in March this year (from a year ago), the consumer price indices (CPI) continued to rise by more than 10% — for urban non-manual employees and industrial workers by about 10.4% and for agricultural as well as rural labourers by more than 11% on a year-on-year basis. To a casual observer of the index movement, such variation would seem strange. There are several reasons for this. Though the inflation shown on TV every thursday shows WPI, we think why daily expenditure is not getting cheaper.

For one, the basket of items that make up these indices as well as the weight assigned to each of these items have a bearing on the composite numbers. The WPI is made up of large number of primary, intermediate and manufactured items, most of which is not directly consumed by an average person. For that matter, much of items that form a household consumption basket have relatively low weight on WPI. The various consumer price indices, in contrast, assign higher weight for items that are commonly consumed by households. For instance, food, beverage, etc, account for nearly half of the CPI for industrial workers (CPI-IW) but just a little more than 28% on the WPI. Likewise, fuel accounts for a little over 6% in CPI-IW but over 14% on the WPI. As a consequence, fall in, say fuel prices would have greater impact on the WPI than the CPI headline numbers.

Secondly, the stage at which data is captured makes a lot of difference — the WPI reflects the ex-factory price of products or their administered price. This would mean most taxes other than excise are not reflected in that index. In comparison, the CPI captures the retail level prices and that includes all taxes, rebates, marketing costs and trade margins. When there is cost push inflation, the WPI captures the price movement much before its effect is felt by the consumers. So while WPI reflects inflationary pressures in general and aids monetary and fiscal policy interventions, the CPI serves as a better barometer of the cost of living. Rather than be led by the headline WPI number, inflation analysis should be based on various components of the index.

So be carefull seeing the inflation index before doing investment plannings. 1000 rs worth of goods today will be 1100 next year . And fixed deposit with 10 % interest in 1 year will not give us good gains seeing this trend.