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WPI may cease to be inflation scale

G. Rambabu

NEW DELHI, June 4

THE Wholesale Price Index (WPI) is likely to be ``derecognised'' as the official measure of inflation rate.

According to highly placed sources, less than a month after the new `refined' WPI replaced the earlier index, work has already started on a separate measure of inflation to reflect, more accurately, the behaviour of the general price level in the economy .

``Although the new WPI is an improvement over its predecessor, it is still not a suitable reflection of inflation in the economy. Currently, the WPI is being passed off for a host of measures which it is not suited to represent,'' they said.

``Conceptually, a measure of inflation should measure prices only at the `final demand' level and not at the `intermediate demand' level. Since the WPI measures prices at the intermediate level, it has been decided to devise an index that will measure pr ices only at the final level of demand,'' the sources said.

Including the prices of intermediate products leads to a cascading effect on the overall inflation as depicted by the WPI, they added. ``For a true measure of inflation, we need an index that will measure price changes of only the final goods,'' they sai d.

The sum total of final goods corresponds to the national income which is the sum total of the final consumption plus trade. Therefore, an appropriate measure of inflation in the economy should ideally net out the intermediaries.

``There is no doubt that the WPI currently used to represent the inflation rate is somewhat unsatisfactory because although it is intended to be an index of all transactions, it is only partly so, since services are excluded. The prices as represented ar e a mix of producers' prices and wholesale market prices,'' they said.

The sources said the Working Group which had recommended the changes in the new WPI introduced recently had also suggested that a different index be used as the official measure of inflation.

It had pointed out that ``as far as the inflation measure is concerned, it is necessary that a proper weighting diagram ought to exclude inter-industry transactions that permeate economic activity but which are not central to the measurement of the pric e of the final goods and services in the system. There is no point in including these, if the objective is to measure the prices of the final vector of consumables.''

The sources said as of now, the WPI continued to be retained as the official measure of inflation because it was the most comprehensive, and available at short intervals of a week. It was, however, hoped that a more meaningful index would be ready soon a s a separate measure of inflation.