The primary index that tracks the change in retail prices of essential goods and services consumed by Indian households is the Consumer Price Index or CPI.
The index assigns different weights to various goods and services in the basket and tracks the movement of their prices. It also tracks the price movement of the entire basket on a pan-India level to calculate the overall inflation figure or CPI inflation. But according to Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers, CPI is not the cost of living index, and is, therefore, not an accurate reflection of consumer spending.
What we spend more on are services such as education, health care and transportation, where inflation levels are much higher," he said. While retail inflation looks at the price at which the consumer buys the product, WPI is measured based on prices at the wholesale level. During the lockdown, for instance, it was more difficult to transport goods, and that additional cost got added to individual prices," said Hajra.
Similarly, if there is scarcity, the retail margin goes up, adding to the price. Another difference between the two indices is that the wholesale market is only for goods, you cannot buy services on a wholesale basis. So WPI does not include services, whereas the retail price index does.
Certain items on WPI, such as fuel, are also closely linked to international prices, creating a gap between the figures on this index and the CPI," said Hajra. Prices of petroleum products, which are at a record high, is the other big factor behind the inflationary spike in India. While fuel inflation is also up in the US, this is largely a base effect. Unlike India, petroleum prices actually went down in the US when crude prices crashed during the pandemic.
This has since increased. What is really driving inflation in the US is a rise in prices of things such as used cars, which experts believe is symptomatic of persisting supply side constraints as demand bounces back in the economy. In contrast, unless the government cuts taxes on petrol and diesel, prices are likely to remain high in India.
India is also expected to experience additional inflationary tailwinds as demand for services rises with the economy opening up. Thanks to the entrenched inequalities in what is a globalised economy, inflation can have very different consequences for different economies.
Interest rates, capital movements and stock markets are one such example. Real interest rates have been almost zero in advanced countries for quite some time. This has encouraged capital to move to emerging markets in search of better returns. If inflation were to rise in the advanced capitalist world, interest rates will have to rise. Even an expectation of this could trigger some sort of capital flight from emerging economies.
This is exactly what happened during what is now referred to as the Taper-Tantrum in So far markets have not reacted negatively to high inflation in the US markets. Two, there are concerns that the higher inflation on the wholesale side could eventually spill over to the retail level in the following months, especially if the new lockdowns and restrictions hit supply chains.
More disruptions could translate into higher inflationary expectations. Click here to join our channel indianexpress and stay updated with the latest headlines. The surge in March was also aided by a low base in the corresponding month of Coronavirus Explained.
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