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Key inflation indices remain out of sync
Jul 16, 2015


Economic polices and statistics have a very crucial relationship. While statistics reflect the real picture and suggest a direction in which policies should be set, they also serve as a feedback if the policy execution has been in the right direction.

It seems we are lagging behind when it comes to quality of the data. One of the most questionable data has been the data on inflation. And the latest statistics on WPI and CPI suggest that we seem to be becoming more irrelevant in terms of data mining over the passage of time. What else could explain the rising divergence between wholesale price inflation (WPI) and consumer price inflation (CPI) over the last 12 months?

As suggested in an article in Firstpost, the latest CPI data for June reflects that the retail inflation is up 5.4%, the second consecutive rise in many months. However, WPI at a negative 2.4% tells a different story. Especially keeping in mind that it is the eighth consecutive decline, implying a decline in the business demand. While some of this divergence could be attributed to the different years chosen as the base for the indices, it does not explain why these two data sets suggest inflation in opposite directions.

The weak WPI data is in line with the weak IIP (Index of Industrial Production) growth. The struggle to maintain and grow the demand is evident in weak corporate profit growth and round the year discounts. However, the new monetary policy agreement considers CPI as the guiding factor. So while the same may suggest the need for high interest rates, will it be in the best interests of the economy?

Inflation being one of the crucial guiding factors for the monetary policy, the authenticity and veracity of data is something that can hardly be over emphasized. In the absence of the same, the entire policy making can be summed up in four words - Garbage in Garbage out.

Data Source:Firstpost

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