WPI: A poor gauge of inflation

India released its official inflation data (Wholesale Price Index, or WPI) for June on Monday. Not surprisingly, inflation inched up, though marginally, to a 4.86 per cent annualised rate (a four-month high) from 4.7 per cent in May.

Despite the deterioration, sub-five per cent inflation is what India's central bank should accept any day. The question is should WPI-based inflation be an important input for monetary policy decision?

Essentially, it should not.

For starters, WPI is highly volatile. Here, I am not referring to the general volatility of the data, but the marked difference observed (over a fairly long period of time) between the initial and final estimates. Between January 2010 and April 2013, WPI-based inflation data was revised 38 times; it was scaled up 32 times. For the entire period, the average revision was an upward adjustment of 0.38 per cent a month.

Importantly, the revision takes place after two months, by which time RBI would have already acted upon the data. On numerous occasions, sub-seven per cent inflation rose to well above seven per cent after revision. While the final inflation data for April was revised downward by 12 basis points (100 basis points is one percentage point), it masks the huge revision within sub-categories due to wrong initial inputs. In my previous piece, I had talked about a sharp upward revision in the coal price index when there was actually no change in prices, while the diesel price index remained the same despite a rise in prices.

 
The sharp revision within some of the categories in April defies logic and indicates poor quality control over data. In April, the coal price index was finally revised downward by about 10 per cent, while the liquefied petroleum gas (LPG) price index was scaled down 12 per cent. Though Coal India Limited raised coal prices five per cent in late May, the coal price index for June stood at 189.7, the same as that for May. Even in the case of crude petroleum, while the Indian basket of crude oil in June was, on an average, higher than that in May by about Rs 300 a barrel, the crude petroleum price index in WPI was actually lower - 304.3 in June compared with 311.4 in May. If these indices are subsequently revised upward, as these should be, WPI inflation for June would stand at above five per cent.

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The author is a Delhi-based independent economist