New Delhi: A Planning Commission-initiated study is pushing for replacing the current practice of releasing year-on-year Indian inflation data based on the Wholesale Price Index (WPI), with seasonally adjusted monthly inflation data, noting that the latter captures early warnings of inflation and is therefore a better measure to forecast short-term inflationary trends.
While the annual year-on-year inflation rate is calculated comparing the WPI of the current year with that in the same week a year ago, the seasonally adjusted monthly inflation data is measured by annualizing the month-to-month inflation after removing the variations in the data due to seasonal factors.
Economists say that the seasonal variations distort the actual inflation level and hence need to be discounted.
The study conducted by three economists—Rudrani Bhattacharya, Ila Patnaik and Ajay Shah—with the Delhi-based economic think tank, National Institute of Public Finance and Policy (NIPFP), says such data is necessary for anticipating future inflation and responding to it through appropriate policy measures ahead of time.
“There are various methods, which can be used to compute seasonally adjusted data, and each one gives a different set of results. We at the statistical commission are also examining this matter,” said Suresh Tendulkar, chairman to Prime Minister’s economic advisory council as well as the National Statistical Commission. Jahangir Aziz, principal economic adviser in the finance ministry, however, said that both the methods should be used to monitor inflationary trends.
“While the year-on-year data shows the speed of inflation, the seasonally adjusted month-on-month data tells you the acceleration in inflation,” he said.
Analysing the high inflation episode of 2008, the study shows that the seasonally adjusted data gives an early warning of three months, compared with the year-on-year data. While the former shows inflationary pressure was building up since December 2007, the latter data captured the trend only by March.
“This early warning is particularly important given the expansionary monetary policy followed between December 2007 and March 2008,” the study said.
Some economists, such as Tushar Poddar of Goldman Sachs Group Inc., have been arguing that the Reserve Bank of India (RBI) was behind the curve in tightening the monetary policy. Though year-on-year inflation data showed acceleration starting from March, the central bank increased the repo rate only in June.
“Caught in the mindset of slowing growth, and viewing the commodity shock as temporary, RBI was too complacent on inflation. Since June, however, RBI has adopted a very hawkish stance,” Poddar wrote in Mint on 30 July.
The study also forecasts that Indian WPI inflation may worsen toward the end of 2008 before declining. However, even by March 2009, year-on-year WPI inflation may continue to be in the double-digit region. While RBI expects WPI inflation to come down to 7% level by March next year, an internal Union government note, first reported by Mint on 17 September, has forecast that inflation will remain close to 8% in the same period.
The study, part of the NIPFP-finance ministry research programme on capital flows and their consequences, finds this transition in inflation measurement critical in the implementation of the monetary policy reforms as suggested by the Percy Mistry and Raghuram Rajan committees.