## Wednesday, September 26, 2007

### Inflation is a stubborn problem

Ila Patnaik says that inflation continues to be a serious problem.

1. Let's stick to WPI (even though I agree CPI is the measure of inflation we must use) for a while.

You will no doubt recollect the rather heated debate on the subject of inflation control a few months back. A few held the RBI measures (interest rates primarily) to have been responsible for the abatement, some others ( SS Bhalla, notably) felt that inflation was supply-shock led and that it was on its way down and RBI measures were uncalled for and your position (big role of rupee appreciation).

Broadly speaking we now know that primary prices and manufactured article prices have failed to moderate to any significant degree and the fall in inflation as measured by WPI is due to an actual fall in fuel prices. These prices are largely administered and though the rising rupee has helped one can't but feel that inflation control is largely an outcome of administrative fiat.

It may well be time to reopen the debate.

2. > Broadly speaking we now know that
> primary prices and
> manufactured article prices
> have failed to moderate to any
> significant degree and the
> fall in inflation as measured
> by WPI is due to an
> actual fall in fuel prices.

No, I don't agree with this. Figure 3 at the IE article shows a nice sharp drop in WPI manufacturing inflation. And, as you know, manufacturing has a ~ 60% weightage in the WPI.

On 6 June, I had written about the simple logic of import parity pricing impacting on WPI manufacturing, which also shows up very nicely in the data surrounding the INR appreciation episode (which was 15 March to 6 April).

3. I realised I should have distinguished between primary and manufactured as soon as I hit the post button, but it was too late !!

Manufactured goods prices have moderated but not to the same degree as fuel prices but as you will see even primary goods WPI fell sharply (even more sharply) along with manufacturing WPI at the time of the rupee appreciation.

However, they have bounced back which reamins to be explained. They had another thing going for them which was the reduction in import duties. It doesn't seem to have worked.

4. If we consider assets price (Real Estate and Stocks etc), our inflation is quite higher than CPI and WPI inflation.

5. Any reason why WPI is used as inflation measure rather than some normalized mix (wealth or population) of CPI?

6. Yes, the WPI is supposed to be the only reasonably accurate data -- CPI etc suffers from data collection difficulties. Or am I mistaken?

Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.