The personal experience of most people regarding everyday prices diverges wildly from newspaper headlines that keep talking about inflation falling to zero in the next month. Individual experience of price changes — which is what inflation measures — is captured by the consumer price index, while the wholesale price index reflects price changes that impact businesses. Newspaper headlines focus on the WPI, as do the government and policymakers. Looked at in another way, the CPI measures price changes of finished goods and services at the retail level: at the local grocery store or in the shopping mall. The basket of goods that comprises the WPI, on the other hand, is a mixture of raw materials, intermediate and finished goods; it is really a family of indices rather than a single one. But, given that consumption is the end of all economic activities, shouldn’t there be a correlation between the two? The WPI should influence the CPI, even if after a lag. But oddly enough, that expectation is belied in the Indian experience. Studies and statistical tests have shown that the WPI has little, if any, impact on the CPI. In fact, they show that over a 13-year period, between 1995 and 2008, just 18 to 20 per cent of all the movements in the two indices have any causal relationship at all.

Economists point out that the CPI has a number of retail goods and services for which competitive forces are rather weak. In the goods that make up the WPI, the abundance of suppliers and providers makes for a very competitive market. That helps to explain — in part at least — why policy objectives are focused on the WPI. The persistent divergence between the two indices has implications for financial markets too. The impact of changes in the WPI is almost immediately visible: for instance, as the WPI has fallen, so have interest rates. The yield on 10-year government securities fell to about 5.5 per cent from nearly 9.5 per cent four months ago. Over the same time frame, yields on 10-year private sector corporate bonds have fallen around 11 per cent to 8.6 per cent currently. But for consumers, borrowers and depositors, the story is a different one. Lending rates, whether for companies or individuals, have declined very little. Deposit rates have remained ‘sticky’ too.

The Reserve Bank of India has undertaken a series of measures from cuts in policy rates to ‘quantitative easing’ — making more money available through cuts in reserve requirements for banks — but interest rates remain stubbornly high, and banks remain wary of lending. Two questions come to mind. Since consumption is 60 per cent of gross domestic product, doesn’t it make sense to accord the CPI a greater focus in policy? Second, is excessive government borrowing part of the problem? Frederick Leith-Ross, chief economic adviser to the United Kingdom government from 1932 to 1945, said that “Inflation is like sin: every government denounces it and every government practises it”.