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Insights into Editorial: Salutary reminder: On Consumer Price Index




Context: Retail inflation rises to 5.03% in February:

  1. The country’s retail inflation, measured by the Consumer Price Index (CPI), rose to 5.03 per cent in the month of February mainly on account of higher food prices.
  2. Separately, India’s factory output, measured in terms of the Index of Industrial Production (IIP), witnessed a contraction of (-)1.6 per cent in January, two separate data released by the Ministry of Statistics & Programme Implementation (MoSPI).
  3. The rate of price rise in the food basket accelerated to 3.87% in February, as against 1.89% in the preceding month, as per data released by the National Statistical Office (NSO).
  4. Inflation in ‘fuel and light’ category remained elevated at 3.53% during the month vis-a-vis 3.87% in January.
  5. The Reserve Bank, which mainly factors in the retail inflation while arriving at its monetary policy, has been asked to keep CPI inflation at 4 per cent with a margin of 2% on either side.



About Wholesale Price Index WPI and Consumer Price Index CPI:

Wholesale Price Index WPI

  1. It is the most widely used inflation indicator in India. Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
  2. All transactions at the first point of bulk sale in the domestic market are included.
  3. Major criticism for this index is that the general public does not buy products at wholesale price.
  4. The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.

Consumer Price Index CPI

  1. It measures price changes from the perspective of a retail buyer. Base Year for CPI is 2012.
  2. It measures changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes.
  3. Four types of CPI are as follows:
    1. CPI for Industrial Workers (IW).
    2. CPI for Agricultural Labourer (AL).
    3. CPI for Rural Labourer (RL).
    4. CPI (Rural/Urban/Combined).
    5. Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.


About Index of Industrial Production:

  1. The Index of Industrial Production (IIP) is an index that shows the growth rates in different industry groups of the economy in a fixed period of time. Base Year for IIP is 2011-2012.
  2. It is compiled and published monthly by the Central Statistical Organization (CSO), Ministry of Statistics and Programme Implementation.
  3. IIP is a composite indicator that measures the growth rate of industry groups classified under: Broad sectors, namely, Mining, Manufacturing, and Electricity. Use-based sectors, namely Basic Goods, Capital Goods, and Intermediate Goods.
  4. The eight core industries of India represent about 40% of the weight of items that are included in the IIP.


Price volatility of fuel and fuel costs needs to be replaced by price stability:

  1. The quinquennial review of the current inflation target under the monetary policy framework, the latest Consumer Price Index (CPI) reading provides a salutary reminder for policymakers to maintain a ceaseless vigil over price stability.
  2. Retail inflation, measured by the CPI, accelerated to a three-month high of 5.03% in February, data released by the National Statistical Office.
  3. The jump of almost 100 basis points from January’s 4.06%, while partly attributable to a base effect given that price gains had relatively eased in February 2020, is a clear signal that food and fuel costs continue to pose a threat to broader price stability in the economy.
  4. Specifically, the RBI’s early February prognostication of continuing pressures in the prices of pulses and edible oils has been borne out by the last two months’ CPI data.
  5. Inflation of both essential food products has persisted in the double digits during the period, and in the case of the latter, accelerated disconcertingly to 20.8% last month.
  6. Price gains with respect to two other key sources of protein, meat and fish and eggs, also remain stuck above 11%.
  7. And the deflation in vegetable costs, which had helped offset the generalised pressure in food inflation, also waned considerably in February to minus 6.7% from minus 15.8% in January.
  8. The upshot was that food and beverages as a combined category, with a weight of 2% in the CPI, witnessed an almost 160 basis points quickening in inflation to 4.25% last month, from January’s 2.67%.


Prices of petroleum products indirectly rises the prices of food and beverages:

  1. Another equally worrisome source of inflationary pressure is the continuing upward trajectory in the prices of petroleum products.
  2. Transport and communication, which directly reflect these prices, saw inflation rocket by more than 200 basis points to 11.4% in February, from 9.3% the preceding month.
  3. Diesel, the main fuel for freight carriage, is now hovering around Rs.85 per litre in many parts and will most certainly feed into the costs of everything requiring to be transported.
  4. Brent crude oil futures have surged by close to 40% in the three-month period through March 11 in the wake of output cuts by major oil producing nations, another worrying portent for inflation.

The doubling in WPI inflation to a 27-month high was fairly broad-based, reflecting the rise in commodity prices brought on by the global risk-on sentiment, a hardening of crude oil and fuel prices, as well as the fading of the favourable base effect for food items.

Economists expects a huge uptick in WPI inflation over the next three months with core and headline WPI rising to around 6 per cent in March.

We maintain our view that inflation dynamics will rule out any further rate cuts, with a status quo expected through 2021.



Any effort to dilute the focus in a purported bid to prioritise growth, risks putting the economy on a perilous path that may secure neither objective.

With the RBI’s own researchers having so cogently laid out the case for persisting with the current flexible inflation targeting regime of ensuring that price gains stay within the 2% to 6% band in the central bank’s first Report on Currency and Finance in eight years.

Policymakers must stay laser focused on keeping price stability front and centre of their fresh framework for the next quinquennium.