India: government releases new, all-India CPI series :: JP Morgan

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India: government releases new, all-India CPI series

Authorities release all-India urban, rural and national (urban + rural) CPI series Recall, older CPI series only applied to specific segments of the population (industrial workers, agricultural labourers, rural labourers) New series have greater geographical coverage and are more representative of household expenditure patterns Weight of services increases sharply in the new series whereas that of food falls Annual rates of inflation under the new series will only be possible to compute from January 2012 due to lack of historical monthly data under the new series Authorities release all-India CPI series The Central Statistical Organization (CSO) on Friday released an all-India consumer price index (CPI) for the rural sector, the urban sector and the entire population (rural and urban combined). A key shortcoming of the previous CPI indices was the fact that they were only applicable to different segments of the population (industrial workers, agricultural labourers, rural labourers) and there was no all-India CPI series that was representative of retail prices across the entire economy. The release of a national CPI series is meant to correct that shortcoming. While policymakers in most countries rely on the headline CPI as the best representation of prices in their economy, India’s policymakers have been forced to rely on the wholesale price index (WPI) instead of the CPI because of the national coverage of the former up until now. A key shortcoming of the WPI is that it does not include services which constitute almost 60 % of GDP and are estimated to constitute a significant fraction of household expenditure baskets. With the release of an all-India CPI series that is more representative of household expenditure patterns and includes services, policymakers in India could potentially rely on this measure of inflation in setting monetary policy in the future once the teething problems with these indices have been sorted out. New CPI more representative of household expenditure patterns A key methodological advantage of the new series is that it is based on the National Sample Survey’s Consumer Expenditure Survey conducted in 2004-5, whereas the weights used in the older CPI series were based on much older expenditure surveys. Specifically, weights in the CPI-Industrial Workers (CPI-IW) were based on the expenditure survey in 1999-2000 whereas the CPI for rural and agricultural workers (CPI-RW, CPI-AW) were based on surveys conducted as far back as 1983. Given this, the weights used in the new CPI series are far more representative of current consumption patterns than the older series. Further, authorities indicated that the weights in the newly-released series will be further revised based on the next consumption expenditure surveys to be conducted in 2011-12. Another methodological advantage in the new series is that prices for housing services will be collected through surveys of sample rented dwellings in each of the selected 310 towns (see discussion of geographical coverage below) for the urban CPI series. This is a significant improvement over the methodology to compute the price of housing in the older CPI series, where the price of housing services was imputed from the house rent allowance given to civil servants. Unsurprisingly, weight of services in the CPI index rises With services growth outstripping growth of industry and GDP over the last decade it was expected that the weight of services would rise compared to the previous CPI indices. Specifically, the weight of housing and other miscellaneous services (education, medical, transport, communication etc) has risen to almost 50% in the national urban CPI series as compared to a weight of about 38% in the CPI for industrial workers used previously. Similarly, the weight of the aforementioned miscellaneous services has more than doubled from about 12% in the older CPI for rural and agricultural workers to about 25% in the national rural CPI index. With services growth remaining strong over the last 5 years, it is expected that the weight attached to services will be increased even further when the 2011-12 expenditure survey is used to modify these weights. Conversely, the weight attached to food has fallen. For example, the share of food, beverages and tobacco is about 60% in the national rural CPI series vis-à-vis more than 70% in the older CPI series for agricultural and rural labourers. Similarly, the weight of food in the national urban CPI series is down to 37% from almost 49% in the older CPI series for industrial workers The new series also has greater geographical coverage Another methodological improvement in the new indices is the enhanced geographical coverage compared to the older indices. Specifically, the all-India urban CPI incorporates more than 1100 price quotations from 310 towns. This is significantly higher than the 78 urban centers that were used in the construction of the CPI for industrial workers. Similarly, the all-India rural CPI series incorporates price offers from almost 1200 villages compared to the 600 villages that were used in the CPI for agricultural and rural labourers. The annual inflation rate under the new CPI series is not 6%! It is still not possible to compute annual inflation rates under the new series because even though provisional monthly indices for CPI rural (107), CPI urban (104) and CPI combined (106) have been released for January 2011, there is no corresponding monthly index for January 2010 that is available. Instead, the base year has been chosen as January-December 2010 with the index averaging 100 over the course of the base year. Despite this, some onlookers have been tempted to conclude that all-India CPI inflation for January 2011 is 6% (since the index in January is 106). This is not correct, since the average index for 2010 was 100 – and data on the index for January 2010 has not been released. As such, year-on-year inflation rates will only be able to be computed starting January 2012. Authorities also made clear that the provisional monthly indices will be revised with a lag of two months and that the revisions will continue for a year till the series gets stabilized and adequate timely receipt of price data is achieved