India’s New inflation Index – Broad Based

The long awaited revision to the WPI series was finally effected today with the release of the August inflation numbers. What’s changed ? At the top level – Primary articles 20.1%, Fuel 14.9% and Manufactured Products 65%. The key changes visible are – Increase in number of items from 435 to 676 items (2) 62% of the index comprises new items with
the manufacturing component seeing the maximum change (3) Increase in the number of price quotations from 1918 to 5482. All of these changes are positive and will help in making the WPI more broad-based and representative of the structural shifts.

The government was under pressure from all corners to include many items and some of the demands met by the government by inclusion are – Motor vehicles: 1.9%, Cotton shirts: 1.5%, HRC Steel: 1.4%, Grey cement: 1.3%
Crude Petrol: 0.9% and Palm Oil: 0.4%.

Taking all the above changes into consideration, the Headline inflation prints lower at 8.5% v/s 9.8% last month. The index is more representative as it has a wider and newer base and (3) The underlying picture is better as the headline number for manufactured product inflation is now at 4.8%.

Index is calculated on the principle of weighted arithmetic mean using the Lasperyre’s formula.

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