Our inflation index lens is hazy but clear enough
The accuracy of India’s economic data has been subject to much controversy in recent years, but it had not engulfed inflation rates based on the consumer price index (CPI). Might that be changing? On Tuesday, the official release for August showed inflation easing to 6.8% year-on-year from a 15-month high of 7.4% in July. This is the gauge used by the Reserve Bank of India (RBI), which is mandated to pursue price stability so that the rupee loses its real retail value only slowly and predictably, turning our currency into the economy’s ally in pursuit of sustained growth. RBI’s central target for inflation is 4%, the difficulty of achieving which has perplexed its monetary policy. Its chief policy rate of 6.5% remains negative in real terms, an aberration, but it expects prices driven up by volatile food items to cool within a month or so, saving it the trouble of having to tighten credit further to dampen demand. Whether RBI’s price-level projections work out will determine if its rate ‘pause’ turns into a pivot. But what if India’s inflation tracker is inaccurate? What if our cost of living isn’t rising as sharply as CPI readings say and policy needn’t tilt at a mere windmill?
Such doubts arise from the fact that the basket of goods and services tracked by the CPI has not been updated for about a decade, while our patterns of mass consumption may have shifted. Consider the weightage of inputs that go into the index value. As befits a country of mostly modest means, food items account for the basket’s bulk. Together with beverages and tobacco, edibles are almost half the index, with clothing and footwear, fuel and light, housing and miscellaneous items making up much of the rest. Of course, each household can construct its own price index from the actual ratio in which its money is spent, but for India as a whole, we must go by a statistical snapshot of what’s being consumed. So a general formula that was appropriate a decade ago, based on India’s consumption expenditure survey of 2011-12, may no longer be so. As incomes rise in any emerging economy, the share of food in every home’s monthly expenses typically declines, while that of other items rises. Today, tales abound of telecom bills paid even by low earners. As our last major consumption survey done in 2017-18 was junked by the Centre (for discrepancies), no clear picture of patterns is available for a CPI-basket revision. Data from the 2022-23 survey expected this year could help. Until its results are out, the index cannot be rejigged with the requisite confidence.
That CPI data might capture our retail reality through a somewhat hazy lens, however, does not deprive this gauge of its utility. Just as phone cameras with ever greater pixel counts make very little difference to most snaps, an updated index may not alter inflation readings much. Food bills probably still dominate the cost-of-living math for most homes, although public provisions have risen. Also, a gauge need not show the absolute truth to serve its purpose as a trend revealer. Often, what’s crucial is not the clarity of the scenario, but the direction and pace of its change. So long as a central bank can grasp price flare-ups and calm-downs with some reliability, low-pixel grabs of the retail scene work well enough. In any case, inflation targeting operates at the aggregate level, aimed at the ‘too much money’ part instead of the ‘too little stuff’ that money is chasing, so hair need not be split over item-wise details. Outdated or not, CPI inflation needs to be quelled—by law.
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Updated: 13 Sep 2023, 09:16 PM IST