Reserve Bank Governor D Subbarao today said consumer price index (CPI) works better than wholesale price index (WPI) in capturing market dynamics and arriving at a more realistic inflation forecast.
"Conceptually, the CPI is a better indicator of demand side pressures than the WPI� and there is no denying that consumer prices better reflect demand side pressures than wholesale prices," Subbarao said at the RBI's 5th Statistical day celebrations at the Mint Road office.
The Governor said a sustained rise in wholesale prices either results in an eventual increase in prices by retailers or a squeeze in their margins.
But if the demand is strong, retailers may exercise pricing power and pass on the increase in wholesale prices to consumers. In case demand is weak, retailers will be forced to partly absorb the increase in wholesale prices in their margins, he said.
However, defending the WPI usage in the apex bank's inflation forecast, Subbarao said, "Given the limited efficacy of monetary policy to deal with food and fuel inflation, and the limits on using core CPI inflation measures, we have focussed our attention on non-food manufactured products inflation as an indicator of demand-side pressures in the economy."
He admitted that there was some merit in the criticism of RBI's inflation forecasts, which has been going off the mark, but pointed out that the bank has "opted for WPI over CPI as a second best choice for a number of reasons, first and most importantly, we do not have a single CPI that is representative of the whole country.
"Until recently we had four, and currently we have three CPIs representing different segments of the population," he said, pointing out that while WPI is computed on an all-India basis, while CPIs are constructed for specific centres and then aggregated to an all-India index.
"Secondly, WPI is available with a shorter lag than the CPIs. Third, WPI has a broader coverage than the CPIs in terms of the number of commodities, quotations, inclusion of non -agricultural products and tradeable items," he said.
