Editorial: Faulty gauge?

Inflation continues to soar. The Wholesale Price Index (WPI) for the week ended May 3 registered a staggering 7.83 per cent increase over the corresponding week of last year, raising questions about the government's repeated assertions that the measures taken in the past few weeks are beginning to pay off. Although some of this increase over the previous week's mark of 7.61 per cent can be attributed to a base effect "" the inflation rate had declined noticeably during the week ended May 5, 2007 "" the reality is that the number is going to intensify the pressure on government from both allied and opposition parties. Short-term solutions, which could create problems down the road, are increasingly likely. Ironically, the high rate is somewhat at odds with the micro-level picture that emerges from the components of the WPI. For example, food prices, which have been seen as a major driver of inflation, not just here but around the world as well, have actually been declining week-on-week for the past few weeks. The notable exceptions are tea and coffee, whose prices have surged during this period, which is no doubt registering rather vividly with consumers. However, prices of both foodgrains and edible oils have been moderating. Even metallic minerals and metal products, the other significant contributors to the recent surge, are showing early signs of moderation, although their year-on-year increases remain extremely high. Not surprisingly, the other items that are seeing sharp week-on-week increases are the petroleum products whose prices are not controlled, notably naphtha, furnace oil and, to a lesser extent, light diesel oil. This underlines the fact that the government, like many others, is suppressing the inflation rate by not raising the prices of other petroleum products and, as a consequence, intensifying pressure on the fiscal deficit.

While the WPI is in the spotlight and its movements are clearly being influenced disproportionately by a small number of commodities, it is important to re-examine the weaknesses in the index and ask questions about whether it is actually capturing the true magnitude of the problem. As was reported in this newspaper last week, there have been strong concerns about the relatively inefficient data collection mechanisms being used for some critical commodities, including minerals, which have been playing a significant role in driving up the index of late. Because of the voluntary nature of data updates, many important items are shown as holding prices constant for long stretches of time, after which a large revision is made, causing the index to spurt. A more accurate gauge of market movements would have allowed adjustments to reflect actual price dynamics, which would both protect the index against these sharp and nerve-wracking jumps and provide policymakers with earlier warning about inflationary tendencies. Although the government has taken a significant step by proposing to amend the relevant legislation to make data provision mandatory, concerns about inefficiency and inaccuracy are likely to remain. There needs to be some thought given to the design of an index, which at once captures price movements of important commodities (and services) in a more accurate and timely fashion and allows observers to clearly differentiate between widespread price movements and more narrowly focused ones. This will allow more constructive debate as well as more efficient policy responses. Inflation is far too important a problem to have to rely on an inadequate and, ultimately, unreliable database for solutions.