Inflation is a vital tool to learn about the consumers’ behaviour. Price stability is indispensable for the proper functioning of an economy. Central banks around the world consider these tools in arriving at the respective country’s monetary policies. The Reserve Bank of India (RBI) considers the concepts, Inflation and Growth, to arrive at a suitable monetary policy for India.
Quick insight into Consumer Price Index (CPI)
The CPI was introduced in India in 2009 and is resorted to as an essential factor to determine inflation. It is calculated by the Central Statistics Office, using the data received from 1,181 villages and 1,114 urban markets, which cover all districts of the nation. The previous month’s CPI data is usually released around the 12th day of the succeeding month.
Headline and Core Inflation
Inflation is mainly understood through two main numbers: – Headline Inflation and Core Inflation. Core inflation is considered more crucial as the prices of food and fuel are dependent on exogenous factors.
In early 2012, India had to deal with ‘double-digit inflation rate’, which continued till the end of 2013. The stringent policies taken by RBI helped to lower the rate effectively. In the current scenario, the inflation rate slowly started to increase in January 2019 and was primarily driven by the increase in food prices in the latter half of same year.
Core inflation has been increasing since the start of the pandemic. This could be the result of supply chain disruptions, uncertainties and rise in inflation expectations. In light of Fuel and Light and Food and Beverages, the CPI figures display moderation when compared to the high statistics of January-March 2020.
Basis for using the ‘Daily prices’
Since the CPI data is released on the 12th day of the succeeding month, it gives rise to lag of information from the end of the previous month. If we consider the real-time prices from the beginning of the month, then it will lead to a lag of over 40 days instead of 12 days. Hence, the use of ‘daily prices’ will be useful.
The webinar’s organizers, ISI Emerging Markets Groups, resorted to the daily prices published by the following three governmental bodies:-
|National Horticulture Board||Department of Consumer Affairs||Indian Oil|
|Vegetables||Oils and Fats|
• The Weights adding up to the total inflation basket
|Items||Weight (in %)|
|Food and Beverage||45.86|
|Pan, tobacco and Intoxicants||2.38|
|Clothing and Footwear||6.53|
|Fuel and Light||6.84|
The above data has been made available in the Simple Model to understand the movement of prices and not just a particular number.
How does the Simple Model function (based on the approach adopted by webinar’s organizers)?
A. Data Selection
- Select the prices for those cities for which the data is available (for fruits and vegetables)- This tends to be complicated due to the ‘seasonal nature’ of the various cities from which the figures for fruits and vegetables are compiled;
- Select model prices (for other items)- These model priced areas sourced from the Department of Consumer Affairs;
- Select the prices across three cities; namely, Chennai, Mumbai and Kolkata (for fuel)- The necessary prices from the fourth metropolitan city, New Delhi, could not be published as the Indian Oil Corporation did not yet release the same at that point of time;
B. Fill any gaps in the data using the Linear Interpolation model, thereby making it consistent.
C. For the purpose of averaging the prices, the city population is used as weight. It is to be noted that the Census of India had published the population data used in 2011 (the year when the last survey was conducted);
D. Take year on year (y/y) changes of all the values to adjust for the seasonality.
• Analysis of each line item (based on heat map created)
‘Heat map’ is a graphical representation of data where colours depict the values. For each line item, the required samples have been decided and chosen by the webinar’s organizers.
|July 2020||August 2020|
For the upcoming period, it is possible that the rates can be either similar or even lower than that of August 2020.
|July 2020||August 2020|
Based on the heat map generated, there are chances that the rate for the month of September 2020 will slightly increase.
3. Pulses and Oils:
|June 2020||July 2020||August 2020||June 2020||July 2020||August 2020|
The inflation rates for September 2020 will likely remain similar to that of August 2020.
4. Cereals, Sugar, Milk and Others
|June 2020||July 2020||August 2020||June 2020||July 2020||August 2020||June 2020||July 2020||August 2020|
Price rates have shown continuous ups and downs per sample. It will likely remain in this manner for the upcoming period too.
|July 2020||August 2020|
As per the heat map generated, it can be observed that the overall inflation price could decrease.
Pros of the Simplicity Model
- Fares well in showing the movement of prices;
- Unnecessary complications have been avoided;
- Accessible and understandable to the users.
Cons of the Simplicity Model
- Prices from the National Horticulture Board are not updated daily for all the produce, despite its daily series;
- Cities are dynamic;
- Seasonal items are continually changing.
With the above data being compiled and further observed, one can hope that the future will not be detrimental to his/her survival and that the ‘post-Corona’ scenario will improve for a better tomorrow.
NOTE- The above information has been obtained based on the webinar conducted by the ISI Emerging Marketing Group (CEIC Data & EMIS) on October 8, 2020 and the materials provided after the webinar. The main speaker was Ms.Rohini Sanyal (Research Economist, India).