Last week when inflation numbers were announced at 0.44% . There were numerous media articles with super headlines like at 20 yr lows , are we in deflation and what not !… Then a couple of days later we would see analysts with some post -mortem reports. There have been lots of discussions on Govt manipulation , political tactics and what not … So a small post to make some facts clear.
In my posting around September 2008 had mentioned the phenemenon of Inflation base effect. At that time it was about 10-13 % because of a low base effect and similarly it was discussed about a possibility where in inflation may plummet quickly this time of the year. To
cut it short click on the link below to read in the details.
It seems the article was very early 🙂
So its a plain statistical deception when somebody says inflationof 0.44 % and i wont be surprised if it goes to sub-zero for some weeks.The last time in September i posted the view was only on the basis of a stability in price index expecting flat to nominal rise in prices of products but instead we have seen two crude price cuts so such a sharp drop in prices was bound to happen!!!
So the current drop is mainly due to the base-effect + the drop in the commodity prices which is more of a statistical phenemenon!! and not a practical impact. Here we aint considering whether the WPI method is at all practical or good enough 🙂 ….
So now lets get into details.
-> WPI is wholesale price Index but the most preferred method is CPI which is consumer price index. Hardly any developed country usesWPI but india does 🙂
-> WPI has a huge weight to the fuel group almost 14% whereas its just 6-7 % in CPI.
-> WPI doesnot have enough weightage to food group. ( Yes food prices are higher but rate is slow. )
-> WPI doesnot include services…. ( India is a service economy )
-> I doubt the weightages have changed in the last 2 decades !!! …Even CPI is equally screwed up on this point.( for a normal man now the cost of tv,pc and mobile matters more then the price of metals or crude. The consumption basket has changed a lot but not WPI constituents)
Although there are many deficiencies in the inflation calculation and will remain for next decade too but as a market participant the 0.44 % , 13% figure does make a sentimental impact and dats the reason to write so many lines on a not so useful statistic.
So the bottomline is WPI as a statistic does not give a real picture but yes it does have a lot of sentimental value on markets and thats why Govt keeps fiddling when to announce it on fridays, thursdays in market hours or after.