India’s official price data says that wholesale inflation rate (measured by the WPI, or wholesale price index) contracted for the 10th successive month in August, in contrast with a roughly flat consumer price index (CPI) figure. There’s a story in this divergence between WPI and CPI, and its key messages are that a. WPI isn’t fully capturing the pain in household budgets, even if it does better than CPI in reflecting onion prices and b. a fall in WPI means little in terms of predicting a fall in interest rates.
WPI is the general price level of a basket of goods calculated at the first point of sale in the domestic market. For example, a farmer selling his wheat at a grain market will be accounted for in the WPI. Wholesale food price inflation has also contracted for the second month in succession. For households, this data should suggest, the monthly kitchen budgets should have been plummeting. But ask any family and the answer is quite the opposite. For middle-class consumers, food inflation worries are actually creeping back in. The farm sector is hurting badly after a full year of unprecedented weather havoc — from a turbulent winter of hailstorms and unseasonal rain that devastated ripening winter-sown crops and delayed harvests to deficient summer rains this year.
The persistent fall in wholesale inflation rates may actually be masking a steady rise in household-end expenditures, which are less noticeable. This is because of a skewed divergence between wholesale and consumer prices. This is partly because the wholesale index does not capture shop-end price changes, which the CPI does. Also, both the indices attach different “weights” to various baskets of commodities. For instance food articles carry a weight of 45.86 in CPI. It implies that, on an average, on every Rs 100 spent in a month people Rs 45.86 is spent on food items. This is not quite the case with the WPI, which assigns a weight of just 14.33 to food items. This means that a rise in the price of vegetables, for instance, will play out differently in both the metrics.
The one place where WPI scores over CPI is in capturing the prices of onions, the pungent bulbs which have driven households to distraction in recent months. Wholesale prices of onions rose 65% year on year this August. The consumer index contains pulses and vegetables in general, but does not disaggregate at the level of individual veggies. Consumer prices fell more than 6%, suggesting an overweighting of potatoes at the cost of the politically sensitive onion and other items.
To be sure, some expenses for families have come down sharply over the last 12 months. Fuel is a case in point. Pump gate prices of petrol and diesel, which move in tandem with international crude prices, are now selling cheaper than a year ago. Both the CPI, which came in for August at 3.66% compared with 3.69%, and WPI capture this trend. But a large segment of the families’ costs have shot up over the last one year, which are not adequately reflected, particularly by WPI. For instance, processed food, leather goods and shampoos, which are demand-driven, are pushing up retail prices. Likewise, WPI is not an appropriate marker for gauging restaurant meal rates, which are determined by realty rentals as well as other variables such as service tax rates. “Prepared meals, snacks and sweets”, a component in the CPI, acts as a proxy to find out how costly eating out has become. This has risen 7.31% in August, a fact the WPI cannot capture. Households are already contending with “high personal expenditure inflation”.
Clearly, the inflation devil continues to haunt households, and different parts of the official price data would tell you this if you knew where to look; it’s the headline numbers that mask the truth.