Measuring Inflation Better

In India, inflation measurement is commonly done using year-on-year growth rates. The change in a price index from March 2009 to March 2010 shows the average rate of change over the 12 intervening months. But the most important thing to focus on is the point-on-point change seen in January, February and March. Computing this requires first seasonally adjusting the price index, so as to avoid being confounded by seasonal fluctuations. We do this at http://www.mayin.org/cycle.in with updates every Monday.

Another big issue in inflation measurement in India is the problems of food and fuel. In both cases, there’s an element of administered prices, so a jump in the point-on-point seasonally adjusted price level might just be a month in which the government raised a price. This is not a statement about the deeper inflation in the economy. In any case, fuel prices are greatly influenced by the global oil price. Food prices often jump around reflecting a good harvest or a bad harvest. In order to understand the deeper `core’ inflation in the domestic economy – the stuff that domestic monetary policy should care about – it’s useful to look at the WPI excluding food and fuel. Starting with yesterday’s release, we do this also.

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