Inflation by WPI and CPI

The Reserve Bank of India (RBI) in its September quarter review surprisingly increased the repo rate onconcerns over inflation. One macro issue in India that deserves renewed attention is the preference for the wholesale price index over the consumer price index for tracking inflation. Indeed, the WPI is given much greater importance than the CPI by the Reserve Bank of India for calibrating its monetary policy. This is a serious policy faux pas. Or core inflation - defined as non-fuel, non-food inflation? In the past, WPI and CPI inflation moved closely together, so ambiguity on which rate to focus on was not such an issue. But over the last five years they have consistently diverged - largely due to food inflation, which has a much bigger weight in the composition of the CPI Index. India's use of WPI inflation for monetary policy is in contrast to the reliance on CPI inflation by central banks and governments in other countries. Perhaps the RBI should rethink the way it gauges inflation. 

Inflation by WPI and CPI

Source: Business Standard

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