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Subbarao in favour of developing a Producer Price Index

19 Jul 2012 Evaluate

Amid the confusing signals of inflation, Dr D. Subbarao, Governor, Reserve Bank of India has said that India needs to have a Producers Price Index (PPI), which measures price changes from the perspective of the seller. The Governor, who constantly keeps a watch on the inflation to shape the apex bank’s policy decision, has said that “It is difficult, even for me, to interpret inflation.” He said the weightage is different for commodities in the consumer price index and the wholesale price index. “This is a problem.”

The RBI governor is of the view that the Wholesale Price Index (WPI) does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes. Further stating he said that the Producer Price Index (PPI) will be better able to measure the average change over time in the sale prices of domestic goods and services as it gives a better picture of price trend as it is less volatile.

Core inflation or Producers Price Index is usually estimated by excluding food and energy prices from the basket of goods and services that represents a household’s spending, as the prices of food and energy tend to fluctuate sharply and such volatility from the supply side gets passed on to the general price index, making it difficult to interpret the overall trend. Meanwhile, India’s headline inflation slowed to its lowest level in five months in June to 7.25 percent.

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