Friday, June 19, 2009

Which is more close to Common man: WPI or CPI

Releasing the wholesale price data, the government said that "the annual rate of inflation, calculated on a point to point to basis stood at minus 1.61 per cent for the week ended June 6, 2009 as compared to 0.13 per cent for the previous week and 11.66 per cent during the corresponding week of previous year". However, food articles were costlier by 8.7 per cent from the comparable week last year as pulses moved up 17 per cent, cereals 13.5 per cent, and fruit and vegetables 10 per cent. The dip was on account of a fall in fuel prices as international crude oil is now ruling around 70 dollars a barrel against over 140 dollars a barrel during the year-ago period.
The negative inflation rate has happened last in the year 1978 when it was -0.6%. Prices of fruits and vegetables had fallen (-8.2%), as had cotton (-13.5%) and oilseeds (-14.6%). Among manufactured products, sugar and gur prices fell dramatically by 23% and edible oil prices by 11%. The government attributed this decline in prices to a good harvest in 1977-78, and cheaper inputs to agriculture. But the prices of pulses increased by over 21% while meat, eggs and fish increased by 11%. This year fruits and vegetables have fallen by 7% but various pulses (except urad and gram) have risen by 1% to 3%. It is interesting to note that the consumer price index (CPI), which measures prices for the retail, actually increased by 1.5% in 1978, even though the inflation rate based on WPI declined. The government uses changes in wholesale prices of various commodities to define inflation rate. So, it is not necessary that falling inflation means that the prices at your local vegetable or grocery shops are falling. Those prices are measured by the CPI. Data for that is yet to come in, but previous month’s figures show that they are moving on their own. Unlike 1978, when prices of non-food items like textiles, metals and machinery had risen considerably, this year, prices of these items have shown only marginal increases, perhaps due to the effects of the global slowdown. With industrial production looking up, as recently revealed by the government, demand for some of these important commodities is likely to pick up in the near future. Does all this mean that prices of cereals/pulses and vegetables have started falling or are likely to fall? That's the common man’s concern. The rate of inflation doesn't help in finding that out because it merely shows the rate of increase in prices compared to one year ago.

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