It’s not all that bad, economy monitor deflates price fears

One proviso, though: Since the CPI comes with a slight lag, the CMIE has been able to compute figures only till July. Some recent developments — like the rise in prices of edible oil and sugar — may push up the CPI too. In fact, CMIE expects it to rise from its current levels of 2-3 per cent to about 4 per cent in the coming months.

In any case, the rate of inflation is not likely to be anywhere close to 8.33 per cent figure reflected in the WPI, an index that CMIE slams as being based on “a mix of commodities that does not reflect anyone’s consumption basket in particular”.

On the other hand, it says that CPI looks at baskets of products and services that broadly reflect what different sections of society consume. The change in price of these products is used to measure inflation in CPI. In its September report, CMIE says that “inflation is benign, lower than the year-ago levels and not rising steeply”.

The evidence? In July, CPI for industrial workers recorded a rise of just 3.2 per cent, much lower than the 4.2 per cent rise recorded a year ago.

If you look at white-collar workers, the inflation was even lower at 3.1 per cent, compared to the 3.7 per cent one year ago. The poorer consumers were even better cushioned, with consumer index for agricultural and rural labourers rising by just 2.1 per cent.

But even if one assumes that the two indices measure different things — CMIE says that in India WPI is a measure of commodity prices and CPI of inflation — how does one explain the wide divergence?

For one, the manufacturing sector has not been able to pass on the higher cost of its inputs to the consumer, says CMIE. Blame competition for this. For example, the prices of metal products have been rising sharply. In fact, metallic minerals (107 per cent) and basic metals (24 per cent) were the fastest growing groups in terms of inflation by July-end. But producers of cars and two-wheelers, eager to protect their market share, have not raised prices for the consumer. At the same time, margins have not been hit substantially because the cost of borrowing has come down.

“This is perhaps the best result of liberalisation,’’ says the report. “As competition increased, it forced domestic manufacturers to improve efficiency and restrained them from working on a cost-plus formula, as in the past.”

The other factor is the weightage given to different commodity groups in the two indices. Even the Finance Ministry, aware of the weaknesses of the WPI, plans to phase it out and replace it with a Producers’ Price Index over the next few years.

Till then, one will have to wait for a delayed index (CPI) or unscientific guesswork to figure out how steeply the prices that matter are rising.