A new measure of inflation is brewing on the horizon

News: A radical shift in paradigm with respect to the calculation of the Consumer price index has recently been initiated in the United Kingdom, by the British journalist, cookbook author, and anti-poverty campaigner, Jack Monroe. The “Vimes Boots Index” as the name of a price index, she planned to document inflation in prices of basic necessities.

What are the concerns with Consumer Price Index (CPI) calculation methodology?

First, the methodology used for selecting the ‘basket’ of commodities and their weights is not reflective of the different socio-economic conditions.

Second, while the CPI corresponds to a “common man”, nobody knows who that common man is and what is his consumption pattern. Consumption pattern widely varies across different economic classes.

Thirdly, India has no income survey and the last publicly available Household Consumer Expenditure Surveys’ data is a decade old. Hence, the choice of the ‘basket’ and fixing weights of its commodities are always tricky tasks.

What are Some of the important facts regarding the Consumer price index?

Consumer Price Index (CPI) — that reflects changes in the retail prices of selected goods and services on which a homogeneous group of consumers spends a major part of their income.

The National Statistical Office (NSO) periodically releases the All India CPI and corresponding Consumer Food Price Index (CFPI) for Rural, Urban, and Combined.

There are three distinct series of CPIs – for industrial workers (IW), for agricultural labourers (AL), for urban non-manual employees (UNME).

The CPI (IW), certainly, is the most popular one as the dearness allowance of Central government employees is calculated based on this index.

What is Sir Pratchett’s ‘boots theory’ is about?

Sir Terry Pratchett had crisply explained the “Sam Vimes ‘Boots’ theory of socio-economic unfairness” in his book series ‘Discworld’. The theory basically explains how the working classes are robbed.

It illustrates that everybody knows that good clothes, boots or furniture are really the cheapest in the end, although they cost more money at first. But the working classes can never afford to buy good things and they are forced to buy cheap rubbish things which are dear at any price. As a result, the poor would spend more on the same good over a period of time than the rich.

He gave the following illustration. For example, a really good pair of leather boots cost $50. But an affordable pair of boots, which is of poor-quality, cost about $10. Good boots, however, last for years and years.

Thus, a man who could afford $50 had a pair of boots that’d still be keeping his feet dry in 10 years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

Source: This post is based on the article “A new measure of inflation is brewing on the horizon” published in The Hindu on 23^rd Jan 2022.