Govt to now peg inflation to general CPI, not WPI

NEW DELHI: The government is planning to construct a general consumer price index, which will bring out change in prices for a basket of commodities for the entire consuming population.
This index will then be a single-point, broad macro-economic parameter that will help in computing inflation, real income and policy formulations.
Once formulated, this index will be used to compute inflation, which is currently based on the wholesale price index. Inflation based on WPI is not the most accurate indicator of change in prices as it does not reflect the price that the consumer pays.
The general consumer price index is expected to be a perfect representative indicator as the current CPI only caters to the following categories: Agricultural labour, industrial workers and urban non-manual employees.
Of the three indices, CPI-IW is most commonly used as the price fluctuations in this category are seen to be the highest.
Besides being a broad macro-economic indicator, the new index could also benefit both public and private sectors in the area of wage formulation. Sources said, most establishments fix wages and dearness allowances based on changes in the CPI-IW index, which is prone to higher fluctuations than the other categories.
Interestingly, even central government employees’ wage compensation is done twice a year based on the movement of CPI-IW. Banks and embassy employees get their pay fixed on the CPI-UNME index, which monitors prices of goods and services in various cities on a monthly basis. And, the CPI-AL is used to work out minimum wages in agriculture.
So, a general price index will prove a broader and more accurate measure for computing wages and salaries. The other benefit is computation of inflation based on the general price index. At present, inflation is computed on the wholesale price index and not a consumer price or a retail price index.
The new index is expected to work on base year ’99-00 with changes every five years. The index would be a weighted average of consumer price movements in the identified basket of commodities in various categories of households in rural and urban India.
It would work like a perfect representative indicator for the country as a whole. Most advanced countries have their general price index while India has indices for three categories.
This index will also be monitored periodically with movements in prices of the commodities in the baskets. The index will be constructed based on a large-scale family survey and through collection of data on prices of the selected commodities.