The new consumer price index (CPI) series is not enough for a robust statistical analysis of prices, Reserve Bank Governor D. Subbarao today said.
He also said that the new CPI series has an excess focus on food prices, which have a 50 per cent weight. House rents, which account for 10 per cent, are also a cause for concern given doubts over the efficacy of the prices.
“The new CPI series has only 19 data points which are not sufficient for a statistically robust analysis,” Subbarao, who demits office on September 5, said at the Statistics Day conference at the RBI headquarters here.
When asked if there is a case for shifting focus to the CPI, Subbarao said even in case of such an eventuality, the central bank will not abandon the wholesale price index (WPI) as a tool to monitor producer prices.
“My own view is we will not, because analytically we need to develop a series of producer price indices that will help us gauge how price momentum builds up in the economy.”
Subbarao said that RBI has traditionally focused more on WPI because of the deeper analytical insights it offers.
“We’ve traditionally used WPI because we thought the legacy CPI is not representative enough for the entire population. WPI is more extensively researched by way of its empirical relationship with other variables like output, monetary aggregates and interest rates and presents richer analytical insight,” he said, conceding that other central banks use CPI for policy formulation.
The new CPI was introduced in 2011 and ever since that Subbarao has been repeatedly asked if RBI will rely more on the new index. His uniform response has been that the central bank uses all the available data points, including the CPI and WPI, in its policy formulation.
The wedge between the WPI and CPI number has consistently been high. For July, WPI came in at 5.71 per cent while the CPI was still hovering around the double-digit mark.
“We have had a problem in calibrating our policy whenever there has been a divergence between CPI and WPI and more importantly, in communicating our policy...it poses a major challenge in assessing inflation dynamics in the short term,” Subbarao said.
He acknowledged that analysts have criticised the WPI for being flawed and also for not considering the services sector, which contributes to two-thirds of the economy.
Maintaining that other central bankers are “reticent” talking about it, Subbarao said that there is no single equilibrium exchange rate which is the most acceptable one to predict the real value of a currency.
He stressed the need to deepen the statistical research capabilities to understand how developments in the external economy spill over in the country’s economy.