Urgent need to rationalise weights under retail inflation: Report

There is an urgent need to rationalise the weights under retail inflation, a SBI Ecowrap report said on Friday.

According to the report, inflation numbers based on a broken CPI methodology hides more things than it reveals.

Consequently, the headline inflation constrains the RBI in its policy decisions.

"With the recent changes in CPI (IW), we again raise questions on the validity of continuing with existing weights in Headline CPI," the report said.

The weighting pattern of food items in CPI, at 45.86 per cent, is based on 2011-12 Consumer Expenditure Survey (CES).

This is significantly different from the share of food and beverages (30 per cent) in the 'Private Final Consumption Expenditure' published by the National Account Statistics (NAS).

"Against such a backdrop, we again reiterate there is urgent need to rationalise the weights under CPI," the report said.

"If we provisionally calculate the new CPI by looking at revised weights of CPI (IW) with 2016 as the base and logically assuming the same trend in CPI, we find that the weights of food in CPI could decline by at least as much as 6 per cent, thus shaving of 50 basis points from current headline CPI at 7.34 per cent."

Such rebasing of CPI, the report pointed out, also finds mention in MPC minutes.

"However, the weights of services could jump by at least 7 per cent through the postulated increase in service consumption pushing up the weighted contribution of miscellaneous inflation by 42 basis points," the Ecowrap said.

"Thus, the overall impact will depend on the strength of food and services, though the bottomline is the revised hypothetical CPI is more representative of demand pressures as weights of services and food could be almost in equal proportion."

However, the report cited that CPI is drawn from "CES and such survey is still pending since 2017".

"Adding to woes, the Oct' 20 CPI inflation will be more than 7 per cent due to unexpected rains in major part of the country," it said.

"Clearly, the inflation numbers based on a broken CPI methodology hides more things than it reveals and RBI will be constrained in its policy decisions, an irony in itself!".