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Opinion » Columns » Chandrasekhar
July 28, 2013

What defines headline inflation?
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Internationally consumer price indices rather than producer price indices are the standard for measuring inflation. or a combination of the two. non-manual employees and agricultural/rural labourers) used to assess the increase in the prices paid by these sections for the commodity bundles they . That problem is no more the focus of attention. The question is what defines headline inflation? For long. since they reflect the prices that ordinary citizens face and pay. it is argued. This is not only because matters have worsened significantly on the external front. 1 economic problem. reflecting more what producers charge their immediate buyers. India does have multiple consumer price indices (for industrial workers. rather than the prices that prevail at the end of the trading chain. “Headline inflation”. is now not as low as it should be but is by no means a major problem. have reined in inflation after a long effort. point-to-point changes in the wholesale price index (WPI) were considered the headline inflation rate. with the weights being their shares in domestic output and their prices those prevailing in wholesale markets. in retail markets. It is also because an impression has got around that the government or the central bank. It is closer to a producer price index. The WPI is a weighted average of the prices of most goods produced in the economy. having been displaced by the widening current account deficit and the weakening rupee. MEDIA TOPICS economy (general) Economy Watch (column) Till recently inflation was considered India’s No.

This does indeed make a difference.7 per cent to 10. When measured using the WPI. trends in the month-on-month annual inflation rate differ substantially. Keywords: Inflation.9 per cent between January 2012 and February 2013. Being still high the RBI is for a tight money regime. Given that. and has since fallen to less than 5 per cent. However. that index shows inflation to be much higher. As Chart 1 shows. weighted by their share in the consumption basket and with their prices collected from retail markets. While Minerals. the Central Statistical Organisation of the government of India released a new. it is surprising that barely a year and a half since annual point-to-point inflation rates have been calculated based on this index (which was first released for January 2011. inflation in Primary articles. and has since fluctuated between 9 and 10 per cent. making January 2012 the first month for which we have an annual rate). In the event. and helped hold aggregate WPI-based inflation steady. with separate indices for rural and urban areas and covering a set of final consumption goods. Early in 2012. since inflation is down. headline inflation. which some in the government feel should be relaxed to spur growth. national. especially non-Food primary articles. therefore. inflation was running at 7-8 per cent between January 2012 and February 2013. has chose to downplay the national CPI and the trends it reveals. and shift to the CPI as an indicator of headline inflation.consume. the government that had wanted to follow what it often terms “international best practice”. However. current account deficit View comment(1)Post Comment More In: Chandrasekhar | Columns | Business | Economy | Opinion | Economy Watch 1 4 Ads by Google . The reason for this significant difference partly lies in the substantial difference in rates of inflation across commodity groups as measured by the WPI. monthly. Since many of these primary goods are likely to be consumed by the ordinary citizen and. inflation measured by the WPI was treated as the measure of headline inflation. when measured using the national CPI. the government and the media have returned to focusing on WPI-based inflation. Perhaps the difference between the government and the Reserve Bank of India on the level of inflation and therefore the need to persist with a high interest rate regime arises because the latter has one eye on inflation as measured by the not-so-new CPI. it had risen from 7. The release was supposed to mark the transition to the use by the government and the central bank of this new index rather than the wholesale price index (WPI) to compute the headline inflation rate. has remained high and even risen sharply during the early part of the period. reference to inflation focus on the WPI. Fuel and Manufactures have registered significant declines in month-on-month inflation rates (Chart 2). which is much less damaging as an indicator of inflation performance. feature in the CPI with a large weight. depending on the index used to compute that rate. While the CPI figures are routinely released. consumer price index (CPI).

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