RBI group for monthly, fixed base inflation rates

The RBI has invited public comments on the recommendations of the technical group, which has expressed the apprehension that “publication of inflation figures, not consistent with actual movements in price series, that is WPI/CPI, may result in biased expectations”.

Currently, the inflation rate is measured on annual point-to-point movement in Wholesale Price Index (WPI). The present system is susceptible to base effect as large base may result in low inflation rate and vice-versa.

Under the new proposal, the inflation rate would also capture the monthly changes in the WPI, using seasonally-adjusted data.

The fixed base inflation, which could take March-end data of the previous year as the base, would be helpful in providing information regarding price movement during the course of the fiscal, the report argued.

As the current inflation rate, which is based on annual point-to-point movement of WPI, suffers from certain disabilities, it can be supplemented with other monthly and fixed base rates to present a better picture of price increase.

Globally, the report of the RBI’s technical group said, inflation is measured on annual point-to-point movement in consumer price index as well as variations over smaller periods of time.

For instance, it said the Bank of England presents inflation rate in its report based on the annual percentage change for each month of the year.

The European Central Bank, it added, presents the inflation rate based on annual percentage change on monthly data, while the Bank of Japan presents annualised, as well as monthly inflation rates, for each month of the year.

All the price series in India, namely WPI and CPI, have peak and trough months around the same time of the year mainly due to seasonality in food prices, it said, adding these “are the major source of seasonality in all price indices”.

In the Indian context, the report further said, prices show increasing trend in August-November, while it declines in the remaining months.

Seasonality plays a major role mainly in CPIs as compared to WPI, the report said, pointing out that “the impact of seasonality is much pronounced in prices of various fruits and vegetables; relatively moderate in some food grains such as wheat, pulses etc.” In case of manufactured products, seasonality is very low and emanates from price changes of food products, it said.