RBI moots Producer Price Index for inflation

SPECIAL CORRESPONDENT                                                                                                MUMBAI, July 18, 2012

It will measure the average change over time in the sale prices of domestic goods and services

The Reserve Bank of India (RBI) Governor D. Subbarao, on Tuesday, proposed a Producer Price Index (PPI), which would measure the average change over time in the sale prices of domestic goods and services.

“In its present structure, the Wholesale Price Index (WPI) does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes,” said Dr. Subbarao, while addressing the sixth annual Statistics Day Conference, here.

For example, he said, the index captured the price of important commodities such as milk from the retail markets; not at the producer level.

In contrast to Consumer Price Index (CPI), PPI measures price changes from the perspective of the seller. Sellers’ and purchasers’ prices differ due to government subsidies, sales and excise taxes, and distribution costs. “For these reasons, it is, therefore, desirable that we move towards PPI,” Dr. Subbarao added.

MEASURE

Theoretically, CPI, which measures changes over time of the general level of prices of goods and services that households acquire for the purpose of consumption, is considered a better measure of inflation than WPI.

But, he said, the new comprehensive CPI did not have adequate history to support data analysis and to be used as a sole headline measure of inflation.

At the same time, the Governor said, the Reserve Bank could not ignore a price index which arguably reflected the most updated economic structure. So, “in our assessment of the inflation situation, we use the new CPI as also the legacy CPIs, but not them alone.”

Also, he said, “structural changes in our economy over the past decade have created an unprecedented demand for commodities. In the absence of a supply response, this has resulted in a lasting change in the price level. Therefore, our headline measure of inflation will necessarily have a larger momentum than core inflation.”

On measurement and interpretation of core inflation, the RBI Governor said that it was usually estimated by excluding food and energy prices from the basket of goods and services that represents a household’s typical spending.

“In an economy like India…..where food constitutes nearly 50 per cent of the consumption basket and fuel has a weight of 15 per cent, can a measure of inflation that excludes them be called core? Inflation in fuel and certain protein food items has been persistent over the last three years. Can a persistent component be excluded from the core measure?” asked Dr. Subbarao.