)
In what would facilitate the Reserve Bank of India (RBI) in its monetary policy action, the statistics office has backcasted the consumer price inflation by estimating the data for years prior to its launch in 2011. With this, the Central Statistics Office (CSO) also attempted to rectify the biggest drawback associated with consumer price index (CPI)-based inflation, the lack of historical data needed for policy decisions. CPI that tracks inflation at the consumer level has become the key measure of inflation used by the RBI for the monetary policy action.
“We have estimated retail inflation for three years prior to 2011 and using the same methodology, we will extend it up to 2004-05. The exercise has been done to primarily help RBI in the monetary policy action asthey want a longer series,” said a CSO official. The CSO, under the ministry of statistics and programme implementation, has made the backward estimation using the wholesale price index (WPI). It has basically established a relationship between WPI and CPI on136 items.
“The CPI baskets have some items, which are common to both WPI and CPI baskets. Indices for these items were predicted using the indices behavior of WPI and their inherent fluctuations and trends. And the indices for remaining items were predicted using their own inherent behaviour only,” a paper that conceptualises the back series data, said. The paper ‘Backcasting of CPI’ is co-authored by CSO Director General Ashish Kumar, and other officials Dilip Kumar Sinha and Soumya Gupta.
The CPI inflation data prior to 2011 is only an estimation and not the actual number. For the remaining items, including services, the estimation was done using the trend followed by each of those items. At the moment, the ministry has estimated inflation data from 2009, but is currently working to take it up to 2005.
The widening difference between the CPI and WPI inflation levels is mainly on account of the sharp decline in crude oil prices and global commodity prices.
“Petroleum is playing a very important role here. The entire effect of decline in global crude prices from $120 per barrel to $60 per barrel is showing up in WPI. On the other hand, the pump prices remained stagnant, as the subsidy was reduced and on top of that excise duty was hiked in petrol and diesel to soak up more taxes,” said National Statistical Commission Chairperson Pronab Sen.
On the other hand, the fall in global commodity prices, coming from steel and other metals is basically showing up in WPI, as they are not covered under CPI, Sen added. Food prices also have a part in higher CPI inflation, as these items have higher 46 per cent weight in the retail price index, but just 14 per cent in WPI.
However, this difference has been there all along, but the larger difference was accentuated by oil prices. According to an agreement reached between the finance ministry and the RBI on monetary policy framework, the target for retail inflation is set at six per cent by January 2016. The target for 2016-17 and all the subsequent years will be four per cent with a band of plus/minus two per cent. The CPI inflation in June rose to 5.40 per cent against 5.01 per cent in May.
RBI Governor Raghuram Rajan maintained a status quo on policy rates in the meeting on Tuesday pointing out that it would cut the policy rate if it felt confident that inflation remained below 6 per cent even after the reduction. It cut repo rate thrice this calendar year by 25 basis points each to 7.25 per cent. The CPI was introduced in 2011, with 2012 being the first year of inflation. That time the base year was 2010. It underwent a base year (to 2012) revision in February this year, reflecting the changing consumption patterns across the country based on 2011-12.
The number of items were increased from 437 to 448 in rural areas and from 450 to 460 in urban areas.The WPI, with 2004-05 as the base year, captures the rate of change in price rise in 676 items.
PRICE POSITION
CSO backcasts CPI series prior to 2011
Aimed to:
-
Help in policy decisions, especially RBI for monetary policy action
-
Exercise done using 136 common items between CPI and WPI
- The data show difference between CPI and WPI inflation widening
Why is the gap widening?
-
Global crude oil fall has not brought down prices at consumer level due to excise duty hike
-
Fall in global commodity prices - only part of WPI and not CPI
-
Services- only captured by CPI and not WPI
- Food- 46% weight in CPI as against only 14% weight in WPI
