PPI OR CPI OR WPI - THE BEST MEASURE?

By Ruma Dubey

The Wholesale Price Index (WPI) was announced on 16th and today, the Consumer Price Index (CPI) came in and it was not very pleasant. In both the indices, food inflation clearly seems to be the trouble maker and with rainfall playing truant, there is only fear of prices going up further.

Naturally, now all eyes are on RBI. The moment inflation numbers come in, everyone expects RBI, not the Govt, to react. How can RBI alone control prices when there are such huge supply bottlenecks? The rotting grains in godowns reflect precisely this flawed process of food distribution. And how can RBI alone correct this logistical nightmare?

There is now a debate raging; not whether RBI will reduce rates on 31st July but which index reflects the true picture of inflation. The RBI Governor, Dr D. Subbarao, yesterday, stated that the present structure of measuring inflation does not capture the price movement of services and was a hybrid of rate quotes. He has thus proposed the Producer Price Index (PPI) which he advocates is a better indication of prices as it measures the average change over time in the sales price of domestic goods and services.

It is often confused with the WPI but that is only because it was earlier labeled as WPI but over a period of time, it is has become apparent that they are two different indices. In simple language, PPI measures the price that producers initially receive for goods and services. It is the purchasing price of the producer, the price of manufactured items at the factory-gate not including taxes, trade margins and transport costs. WPI on other hand, is the measure of price of manufactured goods but does not measure services. It was originally supposed to measure the price at the factory gate, which is what PPI does but it now more a measure of prices at the wholesale mandis. It includes a basket of 676 commodities, covering onions to chemicals and capital equipments.

CPI tracks retail prices paid by consumers for finished products. There is a major difference between the WPI and the CPI as the prices differ due to subsidies, sales tax, excise duties, distribution costs. In that sense PPI is more like core inflation as it is more stable. It usually excludes food and fuel prices from the basket of household spending as they both tend to be very volatile and if this volatility is passed on to the consumer, then it becomes difficult to access the core inflation.

PPI is mainly used to measure the growth of output and CPI is used to adjust income and expenditure or measure cost of living. PPI also usually published monthly will give us the right indication of the core inflation, the best tool while making policy decisions. With 55% of the GDP basket coming from services, with WPI not measuring services and CPI being more volatile, PPI in that sense gives us a steady and more reliable measure of inflation. PPI should replace WPI which somehow today, is neither a PPI nor a CPI, a khichadi or sorts on which policy decisions are based.

If we can have PPI and CPI as the two measures of inflation, that in a sense, will give policy makers a much better picture.

The moot question remains – will RBI reduce rates in 31st July? Unlikely and frankly, RBI has used the entire arsenal in its armour; it is time for the Govt to wake up or else we all could be living a nightmare.