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WPI, CPI divergence seen in food inflation-Partha Sinha
-The Times of India


Mumbai/DELHI: Has the government's statistical office erred with data collection relating to food prices, either by chance or design, for calculating the two inflation indices, Consumer Price Index (CPI) and Wholesale Price Index (WPI) for August?

Else how can someone explain the fact that while food prices as shown in WPI for August exhibit a higher rate of inflation now than a year ago, food inflation as measured by the CPI, also for the month of August, is lower this year?

Normally, you would not expect much of a difference between food inflation numbers calculated from the CPI and WPI. The government does not think so, although the huge discrepancy raises several questions in the mind of the economists, including if there are policy implications for the same. "I don't think so," said Pronob Sen, chairman, Statistical Commission, when asked whether there was any error in calculating the food inflation numbers under the two different indices.

Data released on Monday showed that food inflation based on WPI spiked from 9.3% last August to 18.2% on an annualized basis, while the food inflation figure for CPI for August, which was released last week, showed a decline from 12% to 11% over the same period.

One of the plausible explanations could be that the data used in CPI was collected by the government from shops where the prices of food products were artificially controlled to paint a better picture for consumer inflation. "If the price data that was taken was actually from shops where the prices were controlled, that would not accurately reflect the rise in food prices," said an economist.

Sen said the divergence in the food inflation data in the two indices was largely due to two factors. The first of these is the fact that the CPI does include data from PDS (public distribution system) shops. "In WPI, when you take cereals, only the market price is reflected, while in CPI cereals prices are calculated taking into account the weighted average price between the market price and public distribution system price. The PDS price is constant so it tends to pull down the CPI food inflation," Sen said.

Economists also pointed out that if the data is true and food prices at the retail level rose more slowly in August than at the wholesale level, then the government's long-standing theory that the current spate of inflation was mainly because of supply side bottleneck also falls flat. Sen pointed out that the CPI is calculated on prices at the retail level whereas WPI is done using prices at the mandi level. He said retail mark-ups may sometimes be lower, which reflects in lower retail inflation than in the WPI.

In its report on the economy, SBI too pointed out this interesting trend. "What is perplexing is that CPI edged down in August 2013, which in normal circumstances should have increased, given the preponderance of weightage of food items," wrote Soumya Kanti Ghosh, chief economic advisor, SBI. "This trend of WPI higher than CPI in respect of food items is intriguing and is a trend against normal price behavior and needs to be examined more carefully, as it may have some important policy ramifications," Ghosh noted.