There is no doubt that, conceptually, retail inflation—price rise driven by potential consumer demand and available supply—is a better indicator of inflation for guiding monetary policy decisions than WPI inflation. Even the former RBI governor D Subbarao admitted as much. The release of CPI data, with a shorter time lag and availability of a single all-India measure of retail inflation, could prompt RBI to move towards CPI or its variation as a primary measure of inflation.
The new RBI governor, Raghuram Rajan, has set up a committee to revise and strengthen the monetary policy framework. This committee is looking to recommend an appropriate nominal anchor (implying a measure of inflation) for monetary policy conduct, among other objectives, in its report scheduled for December 2013. Thus, the January 2014 monetary policy review could reflect the change in RBI’s stance on the appropriate inflation measure.
So far, RBI chose the wholesale price index or WPI over CPI, largely for two reasons. First, until 2011, there was no single CPI, representative of the whole country. There were three or four CPI measures, relevant for different segments of population. Now, we have one representative measure of retail inflation with further disaggregation to see how prices in rural and urban India are changing. Second, WPI was earlier available with a shorter lag—only a 2-week delay—compared with CPI inflation which came with a 2-month lag. Now, CPI monthly inflation data is released couple of days prior to WPI inflation data for the same month.
The conceptual case for moving to CPI rests on two points. First, WPI excludes prices of services such as education, healthcare, and rents. However, services now account for nearly 60 per cent of GDP and a vast majority of these services are not traded with other countries. As a result, inflation in these services is largely determined by the domestic demand-supply situation. Conversely, the new CPI measure assigns nearly 36%weightage on services and includes price changes in housing, education, healthcare, transport and communication, personal care and entertainment. CPI, therefore, is a better reflector of demand side pressures in the economy, than wholesale prices.
Second, WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal products group, respectively. Any sharp movements in international prices of fuels and metals, therefore, lead to sharp changes in WPI. This was visible in calendar year 2009 when WPI inflation fell below