Why do we worry over falling growth but not high inflation?

In the last 2-3 years or so, I have usually noted media cry over falling markets/slowing growth but not much worried over spiraling inflation. As IIP and CPI are released on the same day, the next day reports celebrate/cry over IIP trends but not much is written over CPI trends. Even analysts tend to focus more on IIP and not much worried about CPI.

This blog has always supported a quick regime shift to CPI for monetary policymaking. How many countries look at PPI/WPI kind of measures to assess inflation for policymaking?  How many people buy products based on WPI?

India did not have a reliable CPI for a while but now it has one. Yes, the series is available only from 2010 onwards but the trend does not differ much from the older series. All show inflation around 9-10%. So whichever way you look at, CPI inflation shows the same trend whether we look at rural,urban, agri workers, industrial workers etc etc.

WPI declined recently, but CPI remained high and elevated. The difference widened with each release. Core WPI slumped to 2% or so but core CPI remained around 8%. The gap between headline WPI and CPI was lower than core WPI and CPI.  The falling WPI supports rate cuts but looking at CPI suggests policy should remain tight and perhaps be tightened further. If core WPI shows corporates do not have any pricing power why don’t we see the same trends in core-CPI?

So when one reads such pieces by eminent economists, one does not really know what to say. WPI reported at 6.1% mainly because of jump in veg prices. So the author says should on policy be based on veg prices. Well it should not be, but it is not about veggies alone. It is a general inflation trend been seen for a while.  Sometimes it is oil, sometimes tomatoes, sometimes fruits, sometimes protein items, etc etc. The list goes on. I mean some prices drive the inflation up and some prices down. Which is why we have a index which looks at the overall trend.

The main idea is yes we have falling growth levels but we also suffer from this huge inflation problem. Moreover, high inflation  (CPI) has been there for a longer time than falling growth. Yes falling growth should lead to lower inflation but that has not happened. WPI has corrected but it is mainly because of global factors like falling commodity prices etc. Infact high inflation remains a major factor for lower growth. Ignoring inflation was a problem then (with views saying 7% plus inflation is acceptable in a 9% growth situation) and remains a problem even now.

Inflation menace is a huge problem which hurts even more in this phase of low growth and incomes..

One Response to “Why do we worry over falling growth but not high inflation?”

  1. Rambler Says:

    I believe WPI also has weights for products like Dalda oil etc, which are almost obsolete as far as Indian middle class’s consumption patterns go. It has no services component either. It appears an open-and-shut case against WPI. So what defense is offered by the policymakers against the use of CPI? What could be the negatives of CPI??

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