New Delhi: Consumer price inflation rose 7.65% in January from a year earlier, led by food, beverages and fuel, as measured by India's first barometer of prices at the retail level.
The figure, based on the Consumer Price Index (CPI) that’s expected to better reflect price increases borne by the general public, compares with an increase of 6.55%—a 26-month low—in the widely tracked Wholesale Price Index (WPI) in the same month.
According to data released by the Central Statistics Office on Tuesday, consumer price inflation for rural India (CPI-R) was 7.38% and 8.25% for for urban India (CPI-U).
A major component is missing in WPI, services, has been included in CPI, noted Anis Chakravarty, director and senior economist at consulting company Deloitte, Haskins and Sells. The services index, named “miscellaneous” in the CPI, includes medical care, education, recreation, communication and household requisites.
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The new Consumer Price Index made its debut on Tuesday, with the figure for January at 7.65%. Mint’s Asit Ranjan Mishra talks about the significance of the index and its implications for policy makers.
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The services index grew 9.8% in rural India and 7.9% in urban India in January.
“As CPI uses a defined basket of goods and services that is driven from the consumption side, it provides a relatively realistic view on how consumers are affected by inflation,” he said.
The National Statistical Commission set up under C. Rangarajan, chairman of the prime minister’s economic advisory council, first proposed the compilation of a CPI separately for the rural and urban populations because current data do not provide such a breakup.
Until now, India has had three consumer indices reflecting price increases for three different segments of workers—industrial workers (IW), agricultural labourers (AL) and rural labourers (RL).
Also See | Price Barometer (PDF)
Work on a comprehensive CPI started in 2008, when the country saw a surge in inflation as measured by the WPI. The finance ministry instructed the statistics ministry to hasten the process of releasing an all-India CPI, taking the view that wholesale price inflation overstated the price rises in the economy.
Although monthly CPI index data have been released since January last year, monthly inflation rates have not been available so far because of the absence of year-ago numbers.
Price data for the new index is collected from 310 towns and 1,181 villages. While the National Sample Survey Organisation is collecting data for urban centres, the statistics ministry has enlisted the postal department to collect price data from villages.
The new indices will temporarily have calendar 2010 as the base year, which will be shifted to 2011-12 once the 68th consumer expenditure survey is released.
Most central banks in the world use CPI-based inflation to decide their monetary policy framework. This is because the CPI represents the consumption basket of the public and is also used in many countries as the measure for indexing public sector wages and pensions and as the standard benchmark for wage negotiations in the private sector.
The Reserve Bank of India has been using WPI-based inflation to take monetary policy decisions because of the absence of a consumer price index until now. RBI governor D. Subbarao has said in the past that the central bank has opted for WPI over CPI “as a second-best choice”.
“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 an RBI event in Mumbai in July last year.
In January, retail prices in the food and beverages group rose 4.11% at the all-India level, while fuel increased 13.13%, and clothing, bedding and footwear advanced 14.25%.
While experts don’t expect RBI to abandon WPI as the primary inflation source, CPI-based inflation data is expected to provide additional inputs to monetary policy making.
Policy makers in India including the RBI have to follow CPI as it is most representative of the price situation in the country, said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi.
For the time being, RBI may track both CPI- and WPI-based inflation, he said. “One needs to see how robust the CPI numbers are. RBI may take more time than everybody thinks to completely switch to CPI from WPI as the prime inflation indicator,” Bhanumurthy added.
RBI will wait for the index to stabilize before starting to target it, said D.K. Joshi, chief economist at rating agency Crisil Ltd. “CPI has the potential to become an important tool for policy making. A lot will depend on the robustness of data collection,” Joshi said.
Graphic by Sandeep Bhatnagar/Mint
asit.m@livemint.com