👍👍👍👍👍CPI index needs an overhaul – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/cpi-index-needs-an-overhaul/article66672138.ece

The Centre needs to review the computation methodology of the index

With consumer price inflation soaring to multi-decade highs over the past year and policymakers riveted towards establishing price stability, it is imperative that doubts do not arise on the accuracy of the CPI index. This index is the primary input for monetary policy decision-making. But there has been considerable debate around the CPI numbers for January and February 2023, with economists pointing out that inflation could be lower than the number disseminated by authorities in these months.

It was shown that growth in cereal index was much less if the increase in the 20 constituents of cereals and products sub-group were separately computed. Questions have also been raised about the way CPI accounts for goods which are distributed free of cost such as foodgrains under the PM Garib Kalyan Yojana. In this context, a paper in the latest RBI Bulletin, explaining the causes behind such discrepancies and suggesting ways to make the CPI index more robust, is rather interesting. The Centre could use these inputs to review the computation methodology of the index, so that it accurately reflects the consumption patterns in the country.

The discrepancies in the cereal index in the first two months of this calendar are primarily due to free rice and wheat/atta provided under the PMGKY. The CPI gives zero weight to such items with the weight distributed to other items in the cereals group. This re-distribution of weights is distorting the final CPI number. Similarly, seasonal goods, which are not available in some months are also causing ‘data kinks’, as the paper points out. The NSO gives zero weight to such items in months when they are not available. Taking the price of free social transfers as zero instead of reducing their weight to zero may represent the price changes more accurately. As the paper suggests, computing State/UT level indices for each item and then aggregating them to arrive at all-India item indices can help in verifying the price changes in each region, reducing anomalies.

Besides these, timely revision of weights of goods in the CPI basket, in line with the changing consumption patterns is also exigent. The CPI is constructed with 2012 as the base and derives weights for items from the NSS 68 th Round consumer expenditure survey of 2011-12, with classifications based on international standards for easy comparability across nations. But growing digitisation, purchasing power and mobility over the past decade is likely to have significantly altered the weights of some items such as entertainment, travel and data consumption. The weight currently given to food and beverages in CPI at 47 per cent is also quite high and may not reflect current eating habits. Besides, this high weight to food poses a conundrum for regulators, as food inflation cannot be easily controlled through policy measures. The Household Consumption Expenditure Survey 2022-23 needs to be expedited so that the data from it can be used to update the CPI.

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