Widening WPI-CPI gap sparks fears of spurt in inflation

Inflation at sub-zero levels may have diverted public attention from rising prices of daily use items,but the Economic Survey...

Inflation at sub-zero levels may have diverted public attention from rising prices of daily use items,but the Economic Survey sounds alarm bells on the widening gap between wholesale price index-based inflation and consumer price inflation. There are undertones in the survey leading to fears of inflation rate climbing again at a fast pace in the coming days.

For the current year though,chief economic advisor and the surveys principal author Arvind Virmani estimates WPI inflation to remain low and,at best,rise to between 2 per cent and 4 per cent by the last week of March 2010. Food price inflation and the impact of increasing global crude oil prices can,however,change the outlook,he told The Indian Express. Global oil prices have jumped from less than $40 a barrel in December last year to over $70 now,he points out.

The increasing difference between WPI and CPI calls for serious action to correct distortions. It (the widening gap) suggests that the supply chain is unable to cope with accelerating growth in income and consumer demand. This points to the urgency of reforming the land market and real estate sector,retailing,public transport and food supply chain,with a view to promoting modernisation and competition, the survey states.

Story continues below this ad

The survey also cites the effectiveness of the Centres rural development programmes as a reason for high income levels and strong consumer demand in the rural sector,which pushed up the consumer price index for agricultural and rural labour as well as food inflation despite strong agricultural growth.

Commenting on the persistent rise in food prices over the last few months,Virmani said,Nobody has an explanation that why after years of almost 3 per cent agriculture growth the prices are high. GDP deflator is 6.2 per cent and the private consumption deflator is higher than that. Inflation is there,and that has to be weighed while making macro-economic policy.

Apart from food prices,another major concern for the government is the economys heavy reliance on imports for crude oil and commodities. Nearly two-thirds of this rise in inflation (in the second quarter of the last fiscal) was due to three sets of commodities namely,edible oils (including oilseeds and oilcakes),iron and steel (including iron ore) and mineral oils and refinery products, the report said.

Divergent Data worrying

MUMBAI: Though WPI-based inflation fell to minus 1.3 per cent for the week ended June 20,staying negative for the third week in a row,RBI governor D Subbarao on Thursday said divergences in alternative inflation measures falling WPI inflation and rising consumer price index (CPI) inflation complicate the conduct of monetary policy in India. While policy rates have indeed been lowered and bank deposit and lending rates have also come down,albeit not to the same extent,it needs to be recognised that alternative measures of consumer price index (CPI) inflation have continued to rule at elevated levels. ENS