## Sunday, December 20, 2009

### An upsurge in inflation?

There is a lot of concern about inflation. Most of it is based on perusing the following numbers of the year-on-year changes in price indexes:

 Jul Aug Sep Oct CPI (IW) 11.9 11.7 11.6 11.5 WPI -0.7 -0.2 0.5 1.3 WPI Food 13.3 14.0 15.7 13.4 WPI fruits,vegs 15.5 12.0 24.6 11.1
True inflation in India is somewhere between the CPI-IW (which overstates the importance of food) and the WPI (which overstates the importance of tradeables and thus the exchange rate). YOY CPI changes are stubbornly above 10\%, and the yoy WPI inflation seems to have risen in each of the above three changes.

However, the year-on-year growth is the summation of the changes of the last 12 months. To get a sense of what is going on in the recent period, and to not be confused by ancient information, it is essential to look at month-on-month changes. This requires seasonal adjustment.

At http://www.mayin.org/cycle.in, we have a program of regular release of this data, which includes month-on-month changes expressed as `seasonally adjusted annualised rates' (SAAR). This shows:

 Jul Aug Sep Oct CPI (IW) 40.8 10.2 10.8 8.1 WPI 9.7 10.6 5.7 4.5 WPI Food 52.8 14.7 7.7 13.4 WPI fruits,vegs 39.6 -23.7 -3.6 33.2

This shows a rather different picture. We have food inflation, particularly with fruits and vegetables, given that we've just had a bad monsoon. But the overall WPI Food inflation contained one big jump in July and has slowed down after that.

The CPI(IW) gives a lot of weight to food. Hence, it showed a big value in July. After that, it has reported softer values.

The WPI itself was showing values around 10% in July and August, but gave values near 5% in September and October.

This, then, seems to be a relatively benign inflationary environment to me, particularly from the viewpoint of monetary policy. Monetary policy should not take interest in food prices in connection with a monsoon failure, because the time horizon over which monetary policy acts is long - perhaps between 9 and 18 months. By this time, conditions in WPI Food will have been reshaped by many new harvests.

1. Interesting that at a recent panel where current and prior two RBI governor's were present, Dr Subbarao was not worried about food inflation because he believed that monetary policy is not the answer to food inflation. However he did not want it to linger around so that it would become generalized inflation. Dr Jalan was not so sanguine about keeping monetary policy accomodative. Big question is whether government would be able to take the inflation headlines without doing anything.

2. YOu write in 'an upsurge in inflation' that SAAR WPI for OCt 09 is 4.5%. While State of Indian Economy report dt 21 Dec puts SAAR WPI for oct 09 at 13.79% & SAAR 3MMA AT 10.83%. pL GUIDE ME HOW IS 4.5% ARRIVED AT?

Secondly, pl guide me whether SAAR of variables like interest rate, g-sec yield could be calculated and how relevant that would be??

One more thing. these days views abt interest rate is varied. what you think for 10-yr yield endmar 2010 & why. thanks, sir.

nitesh

3. "The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

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