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There is a lot of concern about inflation. Most of it is based on perusing the following numbers of the year-on-year changes in price indexes:

True inflation in India is somewhere between the CPI-IW (which overstates the importance of food) and the WPI (which overstates the importance of tradeables and thus the exchange rate). YOY CPI changes are stubbornly above 10%, and the yoy WPI inflation seems to have risen in each of the above three changes.

However, the year-on-year growth is the summation of the changes of the last 12 months. To get a sense of what is going on in the recent period, and to not be confused by ancient information, it is essential to look at month-on-month changes. This requires seasonal adjustment.

At http://www.mayin.org/cycle.in, we have a program of regular release of this data, which includes month-on-month changes expressed as `seasonally adjusted annualised rates’ (SAAR). This shows:

This shows a rather different picture. We have food inflation, particularly with fruits and vegetables, given that we’ve just had a bad monsoon. But the overall WPI Food inflation contained one big jump in July and has slowed down after that.

The CPI(IW) gives a lot of weight to food. Hence, it showed a big value in July. After that, it has reported softer values.

The WPI itself was showing values around 10% in July and August, but gave values near 5% in September and October.

This, then, seems to be a relatively benign inflationary environment to me, particularly from the viewpoint of monetary policy. Monetary policy should not take interest in food prices in connection with a monsoon failure, because the time horizon over which monetary policy acts is long – perhaps between 9 and 18 months. By this time, conditions in WPI Food will have been reshaped by many new harvests.

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