Monday, February 18, 2013

Consumer Price Index [CPI] makes more sense than the Wholesale Price Index[WPI]

It has often been reiterated that when measuring inflation in India, taking the consumer price index (CPI) makes more sense than the wholesale price index (WPI). This is because the latter does not take into account the prices of food. And higher food prices have been the main reason why consumer price inflation has not really come down even when the WPI has. Thus, does it make sense for the Reserve Bank of India (RBI) to lower interest rates when CPI is still firm? Lowering interest rates would mean that household savings would take a hit. Further, higher food prices eat into the incomes, as a result of which the propensity to spend on non-food items is low. Further, higher fuel prices also have an impact because it adds on to the transportation costs which ultimately reflect in food prices. One of the things that the government needs to do is reduce supply bottlenecks and provide adequate storage facilities. This is so that there is no wastage of foodgrains. This means that adequate supply will ensure that prices stay lower. The mechanism of minimum support prices also needs to be looked into especially when it is not aligned to the market but ends up impacting the market prices instead. Overall, the government cannot base its policies entirely on WPI but needs to attach more importance to the consumer price inflation numbers.