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Your tryst with inflation is far from over. The Reserve Bank of India (RBI), last week, cut interest rates on signs of moderation in inflation. But here's why it may be too soon to conclude that inflation has been reined in as far as you — the consumer — are concerned.
For one, the RBI itself has taken a very cautious stand on headline inflation and has set a target of 6.5 per cent for March 2013. That's not much lower than the current inflation of 6.9 per cent. Two, and more important, inflation, as measured by the new consumer price index (CPI), stands at a much higher 9.5 per cent. The RBI's point of reference, though, is the wholesale price index (WPI) and not the CPI.
The difference is that the WPI captures the price movements at the point of first bulk sale (wholesale), while the CPI captures the change in your (consumer) cost of living.
What's wrong with the WPI? Just that some of the cost involved in getting the goods to you, the end-consumer, may not be factored in by the WPI. This index also gives relatively lower weight to food and fuel and no weight to housing, which forms the core of your consumption.
Also, WPI does not capture the price that you pay for any services. And note that services account for well over a half of the nation's GDP.
Inflation still high
The new CPI index suggests that in March 2012, you would have shelled out 9.9 per cent more of your money to consume the same set of goods and services, compared with a year ago.
That's up from 8.8 per cent year-on-year in February 2012 and far higher than the 6.9 per cent WPI that policy makers have considered. The RBI too has acknowledged that consumer price rise remains high.
The new CPI
The CPI, until recently, was not available on a monthly basis. It also had four different classifications. All this led to the limited use of the CPI. Another measure called the GDP deflator, too, is a once a quarter affair.
With a view to gradually shift to a single headline CPI index, in line with global practices, the Central Statistical Organisation introduced a new CPI series in February 2011 that covers more regions and includes more goods and services. It also has a more recent base year — 2010.
The index is also expected to represent the current consumption patterns better. For instance, compared with the 46.2 per cent weight given to food in the old CPI for Industrial Workers (IW), the new index has a 47.6 per cent weight to food.
Higher weights for cereals and pulses, non-alcoholic beverages, milk and milk products, fruits and vegetables and prepared meals are some of the changes that are in line with the current consumption trends.
Similarly, higher weight to fuel as well as services such as education and medical care are all expected to truly reflect the change in your cost of living. The new CPI also has a simple break-up of urban and rural indices instead of the multi-level classifications given earlier.
Cause for worry
The emerging trend from the new index may well worry you. Needless to say, you would have seen a double-digit rise in the prices of milk and milk products, oils, fish and meat, soft drinks, clothing and fuel in the last one year.
But did you know the services you avail of — medical care, education, transport and personal care — cost 6-8 per cent more? Worse still, house rents climbed 14.4 per cent in just a year in urban areas (rural data not available).
At 9.5 per cent in March 2012, over a year ago, consumer inflation was higher than what you earned from your fixed deposits or even equities, in the last one year. That means, if you are retired or do not have salaried income, your returns from investments have failed to keep pace with rising prices.
To add to this, with the RBI cutting policy rates, banks may follow suite, by first cutting your deposit rates. That may mean a risk of higher inflation and even lower returns from investments.
Even if you are a salaried individual, here's another cause for worry.
Dearness allowance, if you have one, is linked to the old CPI-IW currently. The old index shows a much lower inflation. That means hike in the allowances given to keep pace with higher cost of living is simply not enough.
Amidst all this, the marginal relief on the interest cost of your loans may be little cause for cheer.
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