How the CPI basket conceals the inflation picture

Source: The post is based on an article “How the CPI basket conceals the inflation picture” published in The Hindu on 13^th July 2023.

Syllabus: GS 3 – Growth & Development, Monetary Policy

Relevance: concerns associated with the calculation of CPI

News The article discusses the issues present in calculating the Consumer Price Index (CPI).

What are the issues present with the CPI basket?

Inclusion of Outdated Items: The CPI still monitors a wide range of items, including outdated technologies like torches, radios, tape recorders, CDs, DVDs, etc.

These items have minimal significance in the overall CPI calculation and no longer reflect our current consumption patterns.

Over-reliance on Food Inflation: The weightage of food in the CPI basket has decreased from 60.9 (in 1960) to 57.0 (in 1982) and to 46.2 (in 2001).  This gradual decline indicates that as the economy/income grows, the proportion of income spent on food decreases. This trend is known as Engel’s Law.

However, India still has a significant weightage of food in the CPI. This over-reliance on food inflation distinguishes Indian inflation from many other developed countries where the food weight is much smaller.

This shift in the developed countries imply that as people’s income rises, they tend to allocate a larger proportion of their spending towards non-food items such as housing, education, healthcare, personal care, etc.

Excessive Weightage to Cereals: Cereals are assigned excessively high weight of 9.67 in the CPI basket. This raises two issues –

1. as economies grow and societies evolve, people’s eating habits diversify. This includes moving towards a broader range of nutrient-rich options beyond cereals. This shift in food consumption patterns would have naturally occurred over the past decade, reducing the relative expenditure on cereals.
2. the Pradhan Mantri Garib Kalyan Yojana has significantly decreased cereal expenses for a large segment of the population, potentially modifying consumption patterns and further reducing the relative expenditure on cereals.

Despite these changes, cereals still have excessive weightage in the CPI basket.

However, even though current evolving pattern of consumptions are included in the CPI, challenges would still remain.

What are the challenges present with updating CPI?

Weights for CPI can only undergo a significant shift after data from the Household Consumption Expenditure Survey (CES) is available.

The Ministry of Statistics and Programme Implementation (MoSPI) is currently conducting the CES, with the first round scheduled to conclude in July 2023 and the second round a year later in July 2024.

However, even when the CES results are published around December 2024, creating a new CPI based on this fresh data will take several more months.

Therefore, till then we will continue to rely on outdated parameters to assess inflation. This affects the accuracy of measuring the cost of living and economic well-being.

Moreover, the lack of the CES data has resulted in various issues such as – a) it has become difficult to determine the population under the poverty line accurately, and b) tracking inflation effectively.

What can be the way ahead?

It is crucial for the MoSPI to address these gaps promptly. Efficient data processing should be prioritized without compromise.