MPC Member Questions Accuracy Of Recent Inflation Data
Retail inflation data, according to Ravindra Dholakia, is contrary to other indicators which suggest a fall in price pressures.
An outgoing member of India’s monetary policy committee raised concerns over the inflation data released by the government statistical office for the months when the country was under a lockdown. The data, according to Ravindra Dholakia, was contrary to other indicators which suggest a fall in inflation rather than the rise suggested by the data released by the statistical office.
Data released by the Ministry of Statistics and Programme Implementation showed that inflation was at 7.22% in April, 6.27% in May, 6.23% in June and 6.93% in July. For April and May, imputed inflation data was released.
Imputed Data Not In Sync With Other Indicators
The National Statistical Office said the methodology used to impute inflation followed detailed discussions that took place globally on disruption to data collection due to the pandemic.
In simple terms, the NSO calculated inflation levels for sub-groups within a category by using the wider index. So, for instance, if data for a sub-group within the food category was not available, the broader food index was used to impute it using a pre-approved formula.
Dholakia said he has “strong reservations in accepting the implicit inflation numbers for April and May announced by the NSO”. He argued that the data is not in sync with other indicators available.
He cited two other indicators that showed decline in inflation between March and May:
- Inflation based on the CPI for Industrial Workers released by the Labour Bureau, which has a very high degree of correlation with CPI prepared by NSO, for March, April and May is 5.50, 5.45 and 5.10%, respectively.
- The wholesale price index, which was used to measure inflation in India till 2014, for March, April and May are 0.42, (-)1.57 and (-)3.2%, respectively.
Thus, the imputed CPI and inflation rates implied by them do not seem to be consistent with the alternative measures not only in terms of the magnitude but also in the direction of change.Ravindra Dholakia, Member, India’s Monetary Policy Committee
Fixed Base-Weighted Index Misleading During Shocks
Dholakia raised a second concern, which was partly shared by MPC member and RBI Executive Director Mridul Saggar.
This concern relates to the weight given to different commodities in the inflation index. Inflation in India is based on a “fixed base-weighted index” rather than the “chain-base weighted index” method followed in the developed countries, Dholakia said.
In simple terms, the weight of individual items is fixed based on consumption in the base year rather than in the current year.
“In an extreme situation created by the nationwide lockdown for months, the consumption pattern in the country has significantly and substantially changed,” Dholakia said. “This would simply not be reflected in the measurement of our headline inflation based on the fixed base-weighted index even if all price quotations were available; and would provide an unrealistic measurement of inflation.”
Saggar partly agreed that these fixed weights may have skewed inflation and not captured developments such as a sharp fall in gold consumption. However, his inference was that the overall impact of this methodology may not have been material.
Consumption of gold had dropped but the CPI index is driven by Laspeyres or base-year consumption weights and not Paasche or current consumption weights. The bias on this count, however, could be non-material as high food inflation may have been accompanied by higher current consumption of food in the overall basket.Mridul Saggar, Executive Director, Reserve Bank of India
Break In The Series
The MPC chose to maintain status quo on rates due to these elevated inflation prints as the committee has a legal mandate to keep inflation at 4%, within a tolerance band of +/-2%.
However, RBI Governor Shaktikanta Das said a more realistic assessment of inflation is awaited.
“Though the NSO has adopted best practices in imputing CPI for the months of April and May, the CPI prints for April and May obscure a realistic assessment of the inflationary momentum and can be regarded as a break in the CPI series for monetary policy formulation,” Das said in the MPC minutes.
Dholakia agreed.
“The confusion and uncertainty created by the imputed CPI-C and implied inflation estimates needs to be cleared by more of regular readings on inflation rates,” he said.