THE INFLATION ANOMALY

Have you ever wondered why are the prices of commodities still soaring despite the much touted decrease in the rate of inflation? Why are will still paying exorbitant prices for the food articles despite the daily headlines in the newspapers about negative inflation? These are the questions which any layman, who is not concerned with the nitty-gritty of economics of the country and would rather trouble his mind about making the best use of his puny income in the troubled times, would have difficulty answering. I will try and clear some of the doubts here.

In pure economic terms, Inflation Rate is the percentage increase in the value of a particular price index over a period of time. In India, we calculate the Inflation Rate by taking into consideration the increase in the Wholesale Price Index (WPI) over its value a year ago. Wholesale Price Index is the average change in prices that the domestic producers receive for their products. On the other hand, Consumer Price Index (CPI) examines the weighted average of a basket of goods and services used by the consumers.

The present fall in the Inflation Rate is attributed to the base effect – that is, as the WPI had risen at a higher rate in the corresponding period of last year, a similar increase in the index this year will show lower inflation. Thus, what is happening is that although the prices of most of the food articles are increasing, inflation rate is showing a very low figure primarily due to the base effect. Even though the WPI inflation has gone below zero, the CPI inflation is higher than 8 per cent. Arguably, many economists propound that CPI be used as a measure of inflation, as it reflects a better estimate of the prices of commodities, food articles and services prevailing in the market.

Another lacuna in these indices is the base year that is used to calculate them and the basket of goods that is included. WPI is calculated using the base year 1993 and the CPI is even more archaic as it uses the base year as 1984-85. Also, the basket of 435 commodities used for calculating WPI includes many articles which are obsolete, and it does not include a lot many articles that consumers started using after 1993. Quite an anomaly, I must say!

The common man who voted for the UPA government in the recent parliamentary elections has a lot of expectations. The Union Budget, which will be presented in the Parliament on the 6th of July, will be an apt bellwether of the things to come. I sincerely hope that these anomalies in the calculation of the inflation rate of the country are given a sound thought by the Finance Minister Mr. Pranab Mukherjee and these amendments are accordingly reflected in the Budget ‘09.