Department of Statistical Analysis and Computer Services, Reserve Bank of India
JEL Classification: E 30
Inflation, a rise in the general level of prices, is not an easy thing to measure. Many price statistics are available to keep tabs on average prices. Index like the Wholesale Price Index track the prices of commodities sold in wholesale markets. Others, like the Consumer Price Indices track the prices an average consumer pay for the goods or services they acquire. There are broader indexes, like the GDP deflator, which is based on gross domestic product. While each of the measures has its advantages as well as weaknesses, the selected measure of inflation should broadly capture the interplay of effective demand and supply forces in the economy. However, recent period has witnessed a growing evidence of some divergence in the annual movement of the usual price indices and GDP deflator over the longer term. This paper addresses this issue of why and how movements of GDP deflator diverge from other price indices in India. Besides conceptual differences, GDP deflator and price indices differ on account of the distinct sectoral methodologies followed for converting GDP at current prices to GDP at constant prices. In particular, GDP deflator does not have a long-run equilibrium relationship with WPI. Therefore, utility of WPI as a measure of inflation in India seems to be limited.
