Why aren’t inflation indices in sync? (CPI numbers do not match properly)

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 Why aren’t inflation indices in sync? (CPI numbers do not match properly)

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• Various CPIs used in India: Inflation measurement can be done by using Consumer Price Indices (CPIs) or Wholesale Price Indices (WPIs).

1. The CPI Industry Workers (CPI-IW) is maintained by Labour Bureau since 1946, and is the oldest CPI. The Dearness Allowances (DA) paid to govt workers is based on CPI-IW.
2. Most industrial and service workers covered in CPI-IW are urban, so CPI-IW correlates more with today's CPI and CPI-Urban Consumers (CPI-U). [by MoSPI]
3. Labour bureu uses data from 78 centres for CPI-IW inflation, while MoSPI uses data from 1114 markets (310 towns) for CPI-U inflation. Base year for CPI-IW is 2001, and for CPI-U is 2012.
4. Since 2011, that was so. But not so in past 18 months.

• Deviation: CPI-IW for Dec 2019 was 9.6% compared to 8.6% for Nov 2019. From July 2018, CPI-IW has been more than 5%. But CPI and CPI-U inflation has been below 4% and 4.5% (till Sept 2019).

1. In Oct 2019, CPI inflation went above RBI's target of 4%, and in Dec., went to 7.35% while CPI-U was 7.46%.
2. So there's a divergence between CPI-U and CPI-IW inflations.
3. It is understandable why WPI and CPI may differ, as their compositions are different. A higher CPI and lower WPI may be due to higher food inflation. But that doesn't explain the CPI-U and CPI-IW divergence. (their basket composition is quite similar)

• Correlation: Before March 2018, these two measures had a correlation of 0.79, but after that it became negative. Then it became 0.46. Why?
• Explanation:

1. Both CPI-IW and CPI-U are calculated from price data from multiple centres. There is no subjective survey data being used.
2. Clothing and housing seem to be the drivers of divergence.
3. Housing inflation in CPI-IW was 26% for July 2018 to June 2018, and 12.1 % later. CPI-U housing inflation was 8.3% and later 4.3% in Dec 2019. So the price adjustment since July 2017 for HRA after 7th Pay Commission has been uneven.
4. In clothing, some divergence is seen again.
5. One learning - inflation dynamics for industrial workers is not the same as that of other urban households. So one of the two indices may not be structured properly.

• Time to correct: So the methodology needs to be corrected.
• Summary : There is a big divergence in CPI inflation as measured by the CPI-U of MoSPI and the CPI-IW of Labour Bureau, indicating the need for restructuring.

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