Dip in inflation but rise in shopping bill - Deflation based on wholesale prices matters little to the homemaker’s budget

Deflation is on paper, not on the pocket.

For the first time in three decades, inflation slipped into negative — deflation in the economist’s lexicon — giving the average Calcutta shopper a glimmer of hope amidst spiralling prices. But the deflation — 1.61 per cent for the week that ended June 6 — will not bring down the monthly consumption expenditure of Shreya Mukherjee, a homemaker.

“Prices of almost all daily consumption items have been steadily rising. Can’t they fall or at least stabilise if there is negative inflation?” wondered the north Calcutta homemaker, tired of squeezing the family budget.

Going by the textbook, deflation — when the rate of change in prices turns negative — can lead to falling prices, but when it comes to the homemaker’s shopping list, there is a catch. “This deflation figure is based on an index drawn up on the basis of wholesale prices which doesn’t take into account all the items of daily consumption. So, inflation or deflation does not directly affect the common consumer in a big way,” said Anindya Sen, a professor of economics at IIM Calcutta.

Though inflation — calculated on the basis of wholesale price index (WPI) — was a negative 1.61 per cent, compared to a positive 11.66 per cent for the same week last year, prices of items of daily use like vegetables, cereals and edible oil remained much higher (see box).

The WPI is the price of a representative basket of wholesale goods and changes in the index are used to measure inflation in the economy. The WPI focuses on the price of goods traded between corporations rather than goods bought by consumers. “Our country is perhaps the only major economy in the world which still uses the WPI to measure inflation,” said Sen.

What affects the likes of Shreya is the consumer price index (CPI), which is a measure of the average price of consumer goods and services purchased by households. But as there are various kinds of CPI for different categories, there is always the question of which one to pick as the basis for arriving at inflation figures. “I don’t understand the distinction between different measures. I only know that my monthly expenses are constantly rising,” said Shreya. There is no arguing with that.

A proper index, which the government is working on for the past few years, can capture the spiralling consumer expenditure with a greater degree of accuracy, but it may become a political hot potato. “It’s far easier for the government to highlight lower inflation and give the illusion of stable prices. Perhaps that is why the government prefers to stick with the WPI,” said a city-based economist, who did not wish to be named.

[Source: Telegraph ]