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India Macro Watch
New CPI, but WPI still key
Bottom line: New CPI, but WPI still key inflation measure
„ The government has introduced a new consumer price inflation index with
base 2010 (January-December) today. It will eventually publish a monthly
CPI, an urban CPI and a rural CPI to replace the 4 current measures of CPIIndustrial Workers (base: 2001), CPI-Urban Non-Manual Employees (base:
1984-85), CPI-Agricultural Laborers (base: 1986-87) and CPI-Rural Laborers
(base: 1986-87). Given that the government has not yet released a back
series on the new CPI measures, we would continue to depend on the
wholesale price index (base:2004-05), a cross between CPI and PPI, to
measure inflation. After all, its statistical relationships with money growth or
food/oil/metal price shocks are reasonably well understood.
Why it matters: Functioning CPI in 2-3 years?
„ We may finally get a functioning CPI that will measure the cost of living in
India like almost every other economy. The existing CPIs have not been
useful because their bases are very dated, compilation opaque and data
collection system not as reliable as that of WPI. A national CPI, of course, will
be a compilation for compilation’s sake since the urban and rural baskets are
very different. For example, rural India spends a lot more on food (especially,
cereals) than urban India while urban India spends a lot more on housing. In
the medium-term, of course, the WPI and the CPI do tend to converge
(Charts 1-2). At the same time, the two often deviate in the short run because
of differences in weighting diagrams. The WPI, for example, is far more
exposed to metal prices than the CPI.
Details: So, what’s new? ↓ food, ↑ housing shares
„ Weather shocks will matter less as rising incomes are reducing the proportion
spent on food (Tables 2-3). In the rural CPI index, the share of food has come
down to 59.3% (urban: 37.2%) from 70+% (~50%) in the old one. Besides,
diets are improving as well. The share of cereals, for example, has fallen to
19.1% in the rural CPI from 40% earlier.
„ The share of housing in CPI has naturally gone up by 8-10ppts as the interrelated phenomena of a rising population, breaking up of joint families and
urbanization are pushing up housing demand far ahead of housing supply.
„ The share of education in rural CPI has increased to 2.7% from 0.4% as
increasingly urban aspirations are pushing larger numbers into school.
„ The share of transport and communication has also risen across the board to
5.8% (from 1.8%) in the rural CPI and 9.8% (from 5%) in the urban CPI.
Next up in India: Excess loan demand
„ India: WPI food inflation (11 February), Wednesday, 23 February 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Watch
New CPI, but WPI still key
Bottom line: New CPI, but WPI still key inflation measure
„ The government has introduced a new consumer price inflation index with
base 2010 (January-December) today. It will eventually publish a monthly
CPI, an urban CPI and a rural CPI to replace the 4 current measures of CPIIndustrial Workers (base: 2001), CPI-Urban Non-Manual Employees (base:
1984-85), CPI-Agricultural Laborers (base: 1986-87) and CPI-Rural Laborers
(base: 1986-87). Given that the government has not yet released a back
series on the new CPI measures, we would continue to depend on the
wholesale price index (base:2004-05), a cross between CPI and PPI, to
measure inflation. After all, its statistical relationships with money growth or
food/oil/metal price shocks are reasonably well understood.
Why it matters: Functioning CPI in 2-3 years?
„ We may finally get a functioning CPI that will measure the cost of living in
India like almost every other economy. The existing CPIs have not been
useful because their bases are very dated, compilation opaque and data
collection system not as reliable as that of WPI. A national CPI, of course, will
be a compilation for compilation’s sake since the urban and rural baskets are
very different. For example, rural India spends a lot more on food (especially,
cereals) than urban India while urban India spends a lot more on housing. In
the medium-term, of course, the WPI and the CPI do tend to converge
(Charts 1-2). At the same time, the two often deviate in the short run because
of differences in weighting diagrams. The WPI, for example, is far more
exposed to metal prices than the CPI.
Details: So, what’s new? ↓ food, ↑ housing shares
„ Weather shocks will matter less as rising incomes are reducing the proportion
spent on food (Tables 2-3). In the rural CPI index, the share of food has come
down to 59.3% (urban: 37.2%) from 70+% (~50%) in the old one. Besides,
diets are improving as well. The share of cereals, for example, has fallen to
19.1% in the rural CPI from 40% earlier.
„ The share of housing in CPI has naturally gone up by 8-10ppts as the interrelated phenomena of a rising population, breaking up of joint families and
urbanization are pushing up housing demand far ahead of housing supply.
„ The share of education in rural CPI has increased to 2.7% from 0.4% as
increasingly urban aspirations are pushing larger numbers into school.
„ The share of transport and communication has also risen across the board to
5.8% (from 1.8%) in the rural CPI and 9.8% (from 5%) in the urban CPI.
Next up in India: Excess loan demand
„ India: WPI food inflation (11 February), Wednesday, 23 February 2011.
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