(Source: Reuters website)

Riding on the new series (with year 2004-05 as the base), the Wholesale Price Index (WPI) stepped down to 8.51% for August 2010, from 9.97% in July 2010. However, when calculated on the earlier series - base year (1993-94), the decline appeared marginal, as the WPI inflation fell to 9.50% from 9.97%.

 

Being concerned about the surging food inflation (11.47% as on Aug 28, 2010), Finance Minister – Mr. Pranab Mukherjee reacted on the latest WPI inflation number saying, “Inflationary pressure is still there because food prices have gone up, erratic monsoon and certain other things”.

 

The switch to the new series (with year 2004-05 as the base) had become urgent as the earlier series (with year 1993-94 as the base) had become outdated with obsolete products and unrepresentative weightings. It also suffered from poor data gathering, which resulted in very thin samples being passed off as a headline WPI inflation number.

 

What does the new series for WPI inflation has to offer?

 

• 676 items as against 435 items in the earlier series.
• 62% new items and different weightings to reflect the changes in economy, thus making it more representative.

 

What are the key benefits arising out of this new index?

 

• An updated product basket that is in sync with the consumption pattern today
• Weights assigned to reflect the changing consumer preferences and lifestyles
• Lesser discrepancy between provisional and final figures due to bigger sample size
• National orientation on account of greater geographical diversification in data collection
• Food inflation will be more representative, as frequently revised minimum support prices will be considered, and not the sticky Public Distribution System (PDS) prices.

 

Our view on inflation and interest rates

 

In our opinion the fall in the WPI Inflation for August 2010, is purely on account of fading of base year effect of last year and the introduction of new series. We believe that such a number may not pause RBI’s stance of increasing policy rates, and thus we think that the central bank may increase policy rates (both repo as well as reverse repo) by 25 basis points, in its mid-policy review meeting (scheduled for September 16, 2010) taking cue from the GDP growth rate and 13.8% IIP number for July 2010.

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