Today the weekly headline inflation figure will be released again. It’s becoming a Thursday syndrome — sharp increase in inflation in recent weeks shock and surprise both the government and observers of the Indian economy. Could this have been avoided, given that shock and surprise aren’t good inputs to policy-making? Yes. Early warnings of inflation were available in January 2008. But our method of inflation-watching is faulty.
We watch the year-on-year inflation rate based on the wholesale price index. There has been a debate about how the WPI is not revised on time, or on how the weights do not reflect the consumption or production basket. However, we are stuck with the WPI for now.
What does the rate measure? Standing in August 2008, an increase of 10 per cent year-on-year in the price of oil, for example, means that if, in August 2007, the price of oil was Rs 100 per kg, then today the price of oil is Rs 110 per kg. This could have been because the price rose from Rs 100 to Rs 150 in December 2007, and since then declined to Rs 100 in February 2008, and has stayed steady since March 2008.
Alternatively, it could be that the price of oil remained steady at Rs 100 per kg till March 2007 and has since been steadily rising, and is now up to Rs 110. The two scenarios say very different things about the inflation process. The first one suggests that there was a sharp spike in prices late last year, and we don’t need to take any anti-inflationary measures today. The second, however, suggests that we should worry as prices seem to be getting higher and higher.
... contd.
Epaper
Newsletter
Stocks
Weather
Horoscope
