Kicking the wheels of the new CPI

by Ashish Kumar.

Inflation measurement is a critical component of macroeconomic
policy. In a recent paper, href="http://econpapers.repec.org/RePEc:npf:wpaper:11/83">Patnaik
et. al. have argued that while the CPI-IW has many problems, these
difficulties are not first order, and that the CPI-IW can yield a
reasonable measure of inflation today.

On 18 February 2011, CSO released a new CPI with base year 2010
(Jan-Dec =100). This new CPI has five important new features:

1. It is disaggregated at the rural and urban levels. The new
   overall all India CPI is a weighted average of the two. This
   is in contrast with the earlier CPIs which represented subsets of
   the population (industrial workers, agricultural labourers, rural
   labourers, etc.).
   
   
2. The new series has better geographical as well as commodity
   coverage. The basket of consumer goods has risen from 25 to 250.
   
   
3. The weights have been derived from the 61st round of the NSS
   consumer expenditure survey (2004-05).
   
   
4. Data for the urban CPI will be collected from 310 towns (compared
   to 78 in the current CPI-IW, for all India). The rural CPI will use
   data from 1181 villages. Field officers of the NSSO and the Department
   of Post will be the price collection agents for urban and rural
   centers respectively.
   
   
5. Since the two series are not comparable, year-on-year inflation
   numbers based on the new CPI will be available only from February
   2012.
   
   

Sub Group		New CPI
	Rural	Urban	All India	CPI IW
Food, beverages and tobacco	59.31	37.15	49.71	50.20
Fuel and Light	10.42	8.40	9.49	6.25
Clothing, bedding and footwear	5.36	3.91	4.73	13.28
Housing	0.00	22.53	9.77	5.33
Miscellaneous	24.91	28.00	26.31	24.94

The share of food in the new CPI series has seen a small dip in
comparison to the CPI-IW while the share of services has risen. The
share of housing has also seen a sharp rise. In CPI-IW, the price of
housing services was imputed from the house rent allowance given to
civil servants. For the new CPI series, housing prices will be
collected through surveys of a sample of rented dwellings in 310
towns.

The weights in the new CPI are taken from a household survey by
NSSO. This is, however, already quite dated given that it was
conducted in 2004-05. It is hence interesting to compare these
weights with those seen in the href="http://www.consumer-pyramids.com/">CMIE Consumer Pyramids
dataset, which goes upto the quarter ending Dec 2010. This is a
panel dataset where 140,000 households are measured every
quarter.

The household basket as shown by CMIE gives a weight to rent based
on households that report rent. The CPI uses an imputed rent. An
imputed rent calculation for the CMIE data is not feasible based on
the information presently given out by CMIE. In order to render the
two comparable, we purge both consumption baskets of rent.

Sub Group	New CPI, rural	CMIE: Oct-Dec 2010, rural
Date	2004-05	2010-11
Food, beverages and tobacco	59.31	59.57
Fuel and Light	10.42	12.12
Clothing, bedding and footwear	5.36	3.75
Miscellaneous	24.91	24.54

In rural India, the weights of food and miscellaneous in the new
CPI match that seen in the CMIE consumer pyramids even though the CMIE
dataset is much more timely. In comparison to the Consumer Pyramids
weights, fuel and light is under-weighted while the clothing category
is over-weighted in the new CPI. The fact that these differences are
small gives us increased confidence in the NSSO and in the new
CPI.

Sub Group	New CPI, urban	CMIE: Oct-Dec 2010, urban
survey in	2004-05	2010-11
Food, beverages and tobacco	47.96	45.95
Fuel and Light	10.84	16.45
Clothing, bedding and footwear	5.04	3.78
Miscellaneous	36.14	33.82

A similar comparison in urban India shows noticeable differences in
all categories. The weights for the food group is lower in the CMIE
data. Both the clothing and the miscellaneous categories exhibit
similar patterns. The fuel group has a significantly higher weight in
Consumer Pyramids. Over time, the role of fuel has risen.

Sub Group	New CPI, all India	CMIE: Oct-Dec 2010, all India
survey in	2004-05	2010-11
Food, beverages and tobacco	55.09	53.48
Fuel and Light	10.52	14.06
Clothing, bedding and footwear	5.24	3.77
Miscellaneous	29.16	28.69

All India weights reveal similar patterns as urban India
weights. This is not surprising because all India figures are weighted
averages of rural and urban weights.

Assuming NSSO did a good job of measurement in 2004-05, this
suggests that over a short period of time, the expenditure pattern
of Indian households has been changing at a fast pace.

Despite the issue of weights, the new CPI series is a welcome
step. Improvements in inflation measurement will be an important
component of the Indian process of refashioning monetary policy
to deliver low and stable inflation,