Revise India’s inflation gauge but handle the revision with care
Subscribe to enjoy similar stories. The remarkable insights into the changing pattern of household consumption thrown up by the latest Household Consumption Expenditure Survey (HCES) 2023-24 are of special relevance for a wide range of policy decisions. Take, for instance, an issue that seemed to have become a bone of contention between the government and the Reserve Bank of India (RBI): the role and relevance of food inflation in computing consumer-price inflation and hence in formulating monetary policy.
In recent months, Union ministers have expressed qualms over RBI’s apparent unwillingness to look through inflation driven by food prices in its formulation of monetary policy. Commerce minister Piyush Goyal called for a rate cut, saying that in his personal view, it was a flawed approach to consider food inflation. This was followed by finance minister Nirmala Sitharaman speaking of the need for reduced policy rates.
In December, the central bank under former governor Shaktikanta Das held rates steady on the grounds of what economists call the ‘second-order’ (or spillover) effects of high food prices on topline inflation. And because India’s inflation-targeting regime mandates RBI to keep Consumer Price Index (CPI) inflation—as presently computed with 2011-12 as its base—within a band of 4-6%. This is where the results of the HCES become invaluable.
In arriving at the inflation rate, or the rate of change in the general level of prices over a specified period, the weights attached to different items of consumption are derived from surveys like the HCES. The volatile ‘food and beverages’ component in the present CPI, for instance, has a weight of 46.8%. But this, as the HCES shows, possibly results in effective
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