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Weekening inflation

india Updated: May 22, 2008 22:46 IST

At a time when the UPA government considers its fight against inflation as a central policy objective, what comfort can it derive from a new measure which shows that the phenomenon is not so high as popularly believed? The problem is the other way around: of inflation, as measured by the official wholesale price index being much lower than is popularly believed. According to this index, the rate of inflation is currently 7.8 per cent. But this does not accurately reflect rising prices. If the zooming global oil prices were fully reflected in domestic prices, the wholesale index would be higher by 3.5 percentage points and show an annual rise of 11.3 per cent. True, there are problems with making these year-on-year comparisons. But the new week-on-week measures that show inflation dramatically slowing down will be equally problematical unless the wholesale price index is itself updated and made more comprehensive.

According to the new method — which the International Monetary Fund has elaborated in a discussion paper — week-on-week changes in the wholesale price index from April 5 to May 3, 2008, have been hovering at just about zero. The average of these weekly changes is 0.09 per cent, which implies an annual inflation rate of 4.7 per cent. Rising prices, thus, are currently very much within the comfort zone of 5 per cent. If this number were considered a better estimate of rising prices, what would be the government’s policy stance regarding inflation? Would RBI Governor Y.V. Reddy now consider the current inflation rate as being within acceptable limits and choose to do nothing? And what about the future? If weekly inflation continues to run at 4.7 per cent per annum, inflation would climb to 9 per cent by June and then gradually fall to 6 per cent in February.

While experts will, no doubt, find merit in the new method as being in line with international practices, the moral of the story is: the official wholesale price index itself is not a reliable measure of inflation. Whichever way one chooses to measure it, it makes no real difference -- unless the index is revamped and updated through improvements in price data collection.