Why inflation numbers leave you confused

Inflation measured by Wholesale Price Index (WPI) has been in negative territory for seven continuous months till May 2015, when compared with readings for the same month a year ago. In all likelihood, it will continue to report negative readings for a few months.

The office of the economic advisor in a statement said that the WPI for May 2015 had declined two point four per cent, from a year ago. The downward trajectory was aided largely by a fall in prices of petroleum products and some food items. One may recollect, petrol and diesel were more expensive at the same time last year.

Here are a few things inflation numbers do not normally tell you:

1. The wholesale price index numbers reveal a somewhat different trend when it is compared with readings of the immediately preceding month. This month-on-month comparison indicate an uptick in inflation, not just because fuel prices were raised during May but also because items likes pulses have become dearer. So while WPI on the year-on-year basis declined two point four per cent in May 2015, it rose about one per cent on the month-on-month basis. As a practice, price data is not compared on a month-on-month basis in India because it is not adjusted for seasonal changes.

2. Prices of commonly consumed pulses and lentils have been on the rise for months now, first hurt by lower production due to deficient monsoon last year compared to a bumper crop in 2013 and now in anticipation of another sub-par monsoon. Pulse production was about two million tonnes lower in 2014 compared to the preceding year. It is hoped that imports from overseas – Myanmar, Africa and Canada – will these cool prices in the next few months. Sowing of the kharif crop has been slow this year and the area sown for pulses is about ten per cent less than last year. Pulses, as a group, registered a sharper increase in May, rising seven point five per cent on the month-on-month basis and nearly 29 per cent on a year-on-year basis. Grams or chana, in particular, registered a more than ten per cent increase on the month-on-month basis.

3. Many commonly consumed vegetables such as okra (ladies’ finger) and brinjal got cheaper in May from April, but in May 2015, prices were about 20 per cent higher than they were in May 2014. Onions too are about 20 per cent more expensive this year than a year ago. On the other hand, potatoes cost just about half of what they did last year.

4. WPI tracks inflationary trends in the economy while the Consumer Price Index (CPI) tracks cost of living and therefore the basket of items that the WPI tracks is much larger at over 750 and includes inputs used in manufacturing. In contrast, the basket of items tracked by the CPI are items consumed or paid for by a common man, and includes cost of education, healthcare and rent for housing. This explains why CPI rose five per cent in May while WPI declined two point four per cent.