Why did RBI suddenly switch from WPI to CPI for the monitor of inflation for fixing interest rates in India?
Answer by Jai Parimi:
It is not a sudden change. Even former RBI governor D Subba Rao has advocated the change.
For starters, WPI is & CPI is .
Why RBI chose WPI over CPI in the past?
- Until 2011, there was no single CPI, representative of the whole country. There were three or four CPI measures, relevant for different segments of population.
- WPI was earlier available with a shorter lag only a 2-week delay compared with CPI inflation which came with a 2-month lag.
Why RBI shifted CPI over WPI in the now?
- Now, we have one representative measure of retail inflation with further disaggregation to see how prices in rural and urban India are changing.
- We also have CPI monthly inflation data released couple of days prior to WPI inflation data for the same month.
- Apart from these reasons, WPI excludes prices of services such as education, healthcare, and rents which account for nearly 60 per cent of GDP. As a result, inflation in these services is largely determined by the domestic demand-supply situation. The new CPI measure assigns nearly 36%weightage on services and includes price changes in housing, education, healthcare, transport and communication, personal care and entertainment. CPI, therefore, is a better reflector of demand side pressures in the economy, than wholesale prices.
- WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal products group, respectively. Any sharp movements in international prices of fuels and metals lead to sharp changes in WPI which make it difficult to gauge the underlying inflationary pressures.
- Retail inflation is an indicator of the underlying demand situation in the economy. In a strong demand environment, retailers pass on the entire increase in wholesale prices or even more to their end-consumers, if demand remains weak, retailers witness pressure on margins.
- Another proposal to change the weightage for food in CPI to prevent the seasonal effects to create sharp changes on the monetary policy.
Suggest you to read more atabout Measures of Core Inflation in India – An Empirical Evaluation for more details.