New consumer price inflation measure

A new consumer price index (CPI), which uses calendar year 2010 as the base (100), has been released that "combines data from rural and urban areas and includes sectors that were not part of the existing consumer inflation measure". It will take atleast an year for the CPI inflation rate with the new index to become available, though the CPI index figures themselves will be released every month.

The objective is to obtain a more accurate consumer inflation measure that can be used to formulate policies. The four current consumer price indices (which offer data for industrial workers, agricultural labourers, rural labourers, and urban non-manual employees) are too narrowly targeted to be relevant for macroeconomic policy formulation.

The new consumer price index has five major groups - food, beverages and tobacco group (59.31% in CPI-R and 37.15% in CPI-U); fuel and light group (10.42% in CPI-R, and 8.40% in CPI-U); clothing, bedding and footwear group (5.36% in CPI-R, and 3.91% in CPI-U); housing group (0% in CPI-R, and 22.53% in CPI-U); and miscellaneous group consisting of education, medical care, transport and communication etc (24.91% in CPI-R and 28% in CPI-U).

The measures will be available as CPI-Rural, CPI-Urban, and CPI-combined, and reported state-wise and nation-wide every month. The national CPI will be obtained by merging CPI (Rural) and CPI (Urban) with appropriate weights, as derived from NSS 61st round of Consumer Expenditure Survey (2004-05) data. The weights for all have been derived from the results of the same NSS survey. Price data from 310 towns and 1181 villages across the country will be used to calculate the CPI-U and CPI-R respectively.

This follows measures taken last year to bring forward the base year of the Wholesale Price Index (WPI) from 1993-94 to 2004-05 and increasing its basket of commodities to 676 from 435. There are also plans to revamp the index of industrial production (IIP) to better reflect contemporary consumption and help policy makers take better-informed decisions.

The WPI, which does not fully reflect the actual price impact on consumers, is now used to formulate monetary and other policies. In most developed economies, the consumer price inflation measures are used to guide policy making. The WPI represents only 45% of the economy and largely excludes the dominant services sector, which contrubutes to nearly half the national GDP.

The current regime of one WPI and four CPI's introduce considerable ambiguity and has been one of the important factors in the way of the RBI embracing a full-fledged inflation targeting framework.

In this context, a paper by Ila Patnaik, Ajay Shah and Giovanni Veonese on behalf of the National Institute of Public Finance & Policy (NIPFP) qyestions the suitability of prevailing CPI measures and prefer that the CPI-Industrial Workers (IE) is the most accurate measure of the headline inflation rate.