ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Understanding Recent Trends in Inflation

This article aims at providing a comprehensive analysis of the trends in the current surge in inflation. It tracks the movements in the wholesale price index over the past two years to understand when inflation began to accelerate, asks if this is the result of an across the board price increase and compares consumer prices with wholesale prices.

NOTESjune 14, 2008 EPW Economic & Political Weekly108The author would like to thank Jayrath Shinde for his contribution to the analysis of the consumer price trends and for his valuable comments.Email: neha@epw.in Understanding Recent Trends in InflationNeha Batura This article aims at providing a comprehensive analysis of the trends in the current surge in inflation. It tracks the movements in the wholesale price index over the past two years to understand when inflation began to accelerate, asks if this is the result of an across the board price increase and compares consumer prices with wholesale prices. Inflation, as measured by the wholesale price index (WPI), has become a cause of major concern ever since it crossed 6.5 per cent in March 2008. In the weeks since then it has been steadily rising with-out respite.The recent hike in petroleum product prices is sure to give a new momentum to inflation – first with a one-off jump and then as prices of other products begin to factor in the higher cost of petro-leum products. When did the current surge in inflation really begin? Has there been an across the board rise in prices? If not, which products are driving inflation? And from the point of view of the consumer, what has been the trend in prices of food articles – par-ticularly important in the light of the glo-bal spikes in prices of these commodities. How have consumer prices moved vis-a-vis wholesale prices? The unusual aspect of all the heated discussion in the media and in the political arena is that few have cared to look at these issues in any detail.This short article makes a tentative exploration by looking at the trends in WPI of groups of commodities, over different time periods and identifies the spurts in both. It also sets out the movement in consumer prices to the extent data are available. In January 2007, there was a dramatic increase in inflation to 6 per cent, much higher than the Reserve Bank of India’s (RBI) stated band of 5 to 5.5 per cent. Infla-tion increased alarmingly to touch 6.6 per cent in March 2007.Thereafter, it declined to reach 3.6 per cent in December 2007. However, March 2008 saw inflation cross 6.5 per cent. The acceleration continues with inflation hitting 8.24 per cent in the week ending on May 24, 2008.Measurement As is well known there are broadly three measures of inflation used in India, each with its own limitations and problems: the WPI, consumer price index (CPI) and implicitGDP deflator. There are four consumer price indices: theCPI for industrial workers (CPI-IW),CPI for agricultural labour (CPI-AL), CPI for rural labour (CPI-RL) and CPI for urban non-manual employees (CPI-UNME).1The base years for the WPI andCPI are not revised frequently. The current base year for the WPI is 1993-94. Until 2005, the base years for CPI-IW, CPI-UNME andCPI-AL were 1982, 1984-85 and 1986-87, respec-tively. With effect from 2006, the base year for CPI-IW was revised to 2001.In May 2008, the Department of Indus-trial Policy and Promotion announced that the weekly WPI would be released on a monthly basis by the end of the year, in an attempt to increase the accuracy of data. The base year will also be revised to 2005-06 from 1993-94. The new index will also include data for over400 more new commodities. However, the govern-ment will continue to release weeklyWPI information for certain essential com-modities including farm products. The finance ministry andRBI are reportedly opposed to the WPI being reported every month instead of it being reported every week. It is felt that the switchover would delay policy responses to combat inflation.Owing to its wide coverage of com-modities and frequently available data, theWPI is the most commonly used meas-ure of inflation in India. However, it excludes services and non-tradable com-modities. Further, it only measures head-line inflation.It is important to distinguish between headline inflation and core inflation. Headline inflation includes the entire set of commodities in the general price index; in this case, theWPI. Core inflation does not take into consideration commodities that have volatile prices, for example, food and fuel. It follows that supply shocks that arise from a poor crop yield or hikes in international prices of fuel will lead to increases in headline inflation. In con-trast, core inflation would not be affected by these shocks and would only serve as an indicator of the price levels of commo-dities that have (relatively) non-volatile prices. In India and most other developing
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