Indian Express, 14 August 2004
The rise in inflation based on the Wholesale Price Index (WPI) to 7.6 percent has caught the attention of the government and the bond markets. What has gone unnoticed is that consumers are facing much lower inflation.
In fact, the inflation rate based on the Consumer Price Index for Agricultural Labour (CPI-AL) was —1.21 per cent in June 2004, according to latest data released by the CMIE. The WPI based inflation rate crossed the 5 per cent mark in October 2003, but the inflation for CPI-AL has been lower. In the month of June it turned negative, indicating that prices actually fell. In May 2004 it was 1.8 per cent. The inflation rate based on the CPI for Industrial Workers has also remained low and has been hovering at around 3 per cent.
For the last two years, CPI based inflation rates have been consistently below the WPI based inflation rates. The CPI includes food, fuel, clothing, transport, communication, medical care, entertainment, housing, education, and other such items which directly impact the consumer.
In the last few months the CPI has not risen with the WPI largely because the rise in WPI was the result of a rise in prices of iron and steel, iron ore, aluminum and other metals and minerals. Even though these products feed into consumer goods like cars and air-conditioners, the impact of higher prices may not be passed on the consumer, especially when markets are highly competitive.
The rising competitiveness in Indian industry has changed the pricing formula from the cost-plus formula to one where producers are more willing to take a hit in their profit margins. However, the latest rise in prices is on account of sugar, edible oils and other food items. This is more likely to lead to an increase in the CPI compared to what has been seen in the past.
Also, the expected fall in production of sugar and edible oils due to a poor monsoon is likely to lead to a rise in the prices of these commodities further, unless immediate steps are taken to supplement domestic availability.