Inflation could be lot worse than 7.41%

NEW DELHI: Inflation could be a lot worse than the 7.41% figure for the week ended March 29 that already has the government in a tizzy. If you look at a disaggregated picture of the different indices that together add up to form the wholesale price index, you will be struck by the large number of items whose prices just have not changed. But, that, of course, is only in the index. In the real world, prices do change. But these do not find reflection in the index because of faulty reporting.

The combined weight of these static items ��� including household items such as utensils, batteries, biscuits, processed tea, detergent and toothpaste ��� in the WPI is more than 10%. When the government does finally get hold of information on price changes in these sectors, the index would move up sharply.

Besides, a lot of other items such as fertilisers and pesticides which have over 10% weight in the WPI index, have had their index changed only once, that too at the beginning of this year. Prices of items such as fertilisers are controlled and the index would change only when the government hikes prices. However, even with the exclusion of such items, a significant percentage of the index remained unchanged for a while.

The index for items such as electrical appliances that carry around 2% weight in the WPI has remained static since August 2007. Since the category includes televisions and kitchen items, the WPI-based inflation would not be capturing some important items of household expenditure.

The percentage of items remaining unchanged increases if one were to include items that have not seen any change in the past one month. Electrical machinery, for instance, has a weight of nearly 5% in the index. This item group was last revised on March 1, 2008. In case of drugs and medicines and plastic parts, the last revision was in February. In fact, this infrequent revision could be the reason why the final inflation numbers are turning out to be a lot higher than the provisional figures.

It���s possible that in some cases, the index may have remained unchanged, but there is no way of knowing why the index has not been updated. This has a policy implication because WPI is the most important inflation input for the conduct of monetary and fiscal policy. The WPI index was last recast in 1993-94. An exercise to update the index and restate the indices to a new base year 2000-01 is underway.