Decreasing Inflation: Impact and Consequences

  • SumoMe

Last year the country faced the consequences of a monster double digit inflation for a long time. This year India faces another risk, that of “deflation” with the rate of price rise falling to a record low of 0.44%. This, however, has not translated into lowering of prices, the common man continues to suffer. The reason is that inflation continues to be at approximate 10% according to the Consumer Price Index (CPI) method of measurement while the figures released are calculated through wholesale price index (WPI) method. In the WPI method the cost is computed at various stages of production while only the price of the finished good is calculated in the CPI method. While most developed countries have switched to the CPI method, India continues to use the WPI method. Yet, instead of castigating the government for not switching to the CPI method, we must take a closer look at both these methods, especially since the jargons fail to convince many of us.

 

The WPI index tracks the changes in the average prices of the wholesale markets, a total of 435 commodities are considered for compiling the data. This index is published on a weekly basis and is the most convenient one for the government to measure inflation, the accuracy of which is however, a different question. Firstly a large number of the 435 commodities have lost their importance in terms of consumption, secondly, and more importantly, it ignores the services sector. The service sector which includes services like healthcare and education are becoming increasingly significant from the consumer point of view, thirdly it is argued that this method also is more relevant for measuring the impact on business than on the average consumer.

 

The CPI index on the other hand in simple terms tracks the prices of a specific section of goods and services consumed by the people. It is considered by many, as the Cost of Living Index. Many believe this to be an accurate measure of the effect that inflation has on the consumer. The situation in India is however not simple. There are four different CPI indices at work, one each for the industrial workers, urban non-manual workers, agricultural workers, rural workers. There is also a considerable lag in reporting the CPI figures.

 

Once a clear picture emerges of these two methods it is clear that the shift from one method to another is perhaps not that easy. Till India adopts the CPI method, one at least hopes that some corrective measures are taken in the earlier one. The list of the 435 commodities is based on an outdated survey which needs to be revised; this would perhaps ensure more relevance. Meanwhile the decrease in agricultural production is responsible for the continual rise in prices of food items. The lowered inflation rates thus mean little to the average middle class citizen and the conditions continue to worsen for those who are languishing in poverty. Though petroleum prices and the prices of manufactured goods have decreased, man’s most basic necessities, adequate food, shelter and clothing remains out of reach for many. The RBI chief’s comment that “We are not getting into structural deflation like advances economies” brings some relief but hardly solves the problem of the rising CPI inflation.

 

It is important that the statistics that are used to decide the condition of the economy be accurate and reliable, and steps need to be taken in this direction to achieve this.

 

Shiny Das

[Image source:http://www.flickr.com/photos/mr_beaver/2842592567/]

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