Why does the RBI now want to shift to targeting CPI from the WPI? Because it reflects the prices of our consumption basket rather than that of goods sold in the wholesale market.
Why has CPI shot up above WPI inflation? Because food, whose prices are rising, has a larger share in it (50% vs 24% in WPI) in contrast to metals, whose prices are falling, that has 11% share in the WPI.
Isn’t CPI largely driven by food shocks ? A 5% swing in food prices directly impacts CPI inflation by 250bp. Other key factors include oil prices and INR as Currency.
Why is core CPI inflation sticky at 8%? Due to better standards of living and housing price data issues.
Can the RBI target 4% CPI inflation recommended by the Patel committee? Yes, if there are favorable factors like stable INR and relatively stable global food prices a la 1999-2006. The actual inflation mandate, it now appears, will be set by Delhi's Prime Minister.
