WPI nos giving 3 mths heads-up; 6% year-end CPI likely: Sen

The wholesale price index (WPI) numbers were trending lower for a while and only now has it found its way into the consumer market says former chief statistician Pronab Sen.

In an interview to CNBC-TV18, Sen says the WPI is now becoming the lead indicator for core inflation and is infact giving a 2-3 months head up.

The Central Statistics Organisation (CSO) changed the CPI base year from 2009-10 to 2011-12 as well as broadened the item basket, apart from making certain statistical changes to calculating the mean. This led to inflation for January inching up to 5.11 percent year-on-year, compared to 4.28 percent in December.

Below is the verbatim transcript of the interview to CNBC-TV18 .

Latha: Can you throw some light, it doesn't seem like a big revision? Last months 5 percent has become 4.28 percent. So, should we be now prepared that our old fan chart of expectations need not be very radically altered?

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Sen: Yes, more or less. The main difference has taken place is earlier we were using the arithmetic mean which was not very good practice and now we have moved to geometric mean. So, it shouldn’t make very much of a difference except in those cases where you have outliers happening. In such cases the geometric mean will actually dampen the effect of the outliers unlike the arithmetic mean. So, so long as everything is moving pretty much within the boundaries you should not expect too much change.

Latha: Would you be a little surprised that the core CPI or the services CPI has fallen so much, is this changes in weight or is this genuinely prices slowing down?

Sen: I think the prices are actually slowing down.

Latha: That would mean that the back of inflation has been somewhat more seminally broken?

Sen: Yes. Everybody was expecting the base effect to kick in which is not happening, prices are trending.

Latha: I just wanted your idea of the trajectory in the new series with the January inflation coming in at 5.1 percent and core CPI coming in at 4 percent. What is your sense about the year end inflation, do we see it quite emphatically below 6 percent?

Sen: I think so. The fact that the core inflation has come down shouldn’t really have come as a surprise to anybody. WPI has been pointing towards that for a while now and it has finally found its way into the consumer market. Frankly what is happening is as far as core inflation is concerned I think the WPI is becoming a lead indicator. I think it is giving us a 2-3 months head up. So, you should look at what is happening to WPI.

If you look at what is happening to WPI going forward you should in fact expect the CPI to be moderate.

Latha: As a statistician is there in your mind any lag with which the core CPI will follow from the WPI because we got a reading of zero in November and 0.1 in December. So, do we have a goodish bit of fall coming in the core CPI?

Sen: It is not a one-to-one relationship. What the WPI core points to is a trend in the CPI with a lag and not more than that. You can't say because it was zero it is going to be zero two months later, that doesn’t follow.

Ekta: I just wanted to come in on the fact that what would core CPI look like within this CPI basket now and how would one calculate it and would there be any sort of change in the weightage as per that versus the earlier base?

Sen: This is an interpretational thing. If you look at the notion of core normally what is done is you exclude food and energy. However if you think about the reason you do it is that because there are subjected to factors which are not really driven by demand conditions. However within the food category if you think about what we call the animal proteins, which is the animal husbandry sector which isn’t driven by weather then perhaps we should actually think about including as a part of the core. The debate around what can constitute a core in CPI I do not think has taken place.

Latha: Do you personally support this real rate of 1.5-2 percent and in that case in your estimate what might be the policy rate cuts that we can look at?

Sen: The real issue is that if you think about the WPI as representing the prices faced by the producers, a policy rate of somewhere around 7-7.5 percent would essentially imply a real rate to physical investors of somewhere above 4.5 percent. That is something one should think about, that what is the real rate that will actually sort of impact your investment cycle.

Real rate facing producers was very tall and 50-75 basis points cut doesn’t dramatically alter that situation.

Latha: Soumya Kanti Ghosh was guessing that the inflation might for FY16 end somewhere or average somewhere between 5 and 5.3 percent, would you share that optimism?

Sen: It is difficult to say. The fact of the matter is that if the economy starts picking up as we all hope it will very strongly in terms of the volume of output, you could expect some upward pressure on food prices again. I do not entirely rule that out. The Met has predicted a normal monsoon, the fact of the matter is that as far as the protein segment is concerned the monsoons don’t matter that much. So, if food prices start creeping up again as they will because there is a structural issue there which hasn’t been addressed, then there may be an upside risk.