The Hindu Business Line : A tale of two ‘low’ inflation episodes

New Delhi, Nov. 11 The annual wholesale price index (WPI)-based inflation rate falling below the three per cent mark for the first time in over five years may please mandarins and analysts, who would see it as a vindication of proactive supply-side measures in conjunction with sensible monetary and fiscal policies.

The 2.97 per cent year-on-year WPI increase for the latest recorded week ended October 27 is the lowest-ever since the 2.86 per cent level of July 20, 2002. The current headline inflation rate has, thus, touched a 275-week low. While that may seem impressive for the habitual number-cruncher or policymaker, it is unlikely to, however, cut ice with the common man.

The reason for the aam aadmi’s scepticism partially lies in the WPI-based inflation not being of much consequence to him, against the more relevant rates derived from the consumer price index (CPI). And here, the numbers reveal a stark contrast. The WPI-based annual inflation during September averaged 3.39 per cent, but the corresponding CPI rates were far higher: 7.89 per cent for agricultural and rural labourers (AL), 6.4 per cent for industrial workers (IW) and 5.74 per cent for urban non-manual employees (UNME).

But isn’t this gap between WPI and CPI-based inflation rates a normal phenomenon? Well, not really so, if one looks back at the previous low inflation period of mid-2002.

In July 2002, the average WPI-based inflation stood at 2.79 per cent, while being 2.27 per cent for CPI-AL, 3.89 per cent for CPI-IW and 3.84 per cent for CPI-UNME. In other words, unlike the present ‘low’ inflation episode, there was very little divergence between WPI and CPI-linked rates.

Then and now

The divergence is, in turn, reflective of the nature of inflation (or lack of it) then and now. The recent inflationary episode has been largely food articles-driven. While the annual WPI increase for the week ended October 27 may have been only 2.97 per cent, hidden within this overall number are corresponding rates of 11.68 per cent for edible oils, 12.92 per cent for tomatoes, 8.27 per cent for milk, 6.10 per cent for rice and, well, 108.76 per cent for onions!

The huge price jump in these essential commodities is better captured in the CPIs, where the combined weight of food is 40 per cent for UNME and 46 per cent for IW. On the other hand, food articles (edible oils and sugar included) have a weight of just 22 per cent in the WPI, which is why the apparently low headline inflation is yet to be ‘felt’ by the consumer.

The difference between mid-2002 and now is that the former period coincided with burgeoning public grain inventories and downward pressure on domestic as well as global commodity prices. As a result, not only was inflation officially low, but the consumer, too, shared this perception.

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