Mumbai, July 17 (PTI): Reserve Bank of India Governor D Subbarao on Tuesday proposed a producer price index, saying that the present structure of measuring inflation does not capture the price movement of services and is a hybrid of rate quotes.

The Producer Price Index or PPI will be better able to measure the average change over time in the sale prices of domestic goods and services, he said.

“In its present structure, the wholesale price index does not capture the price movement of services. Also, it is a hybrid of consumer and producer price quotes,” he said at the Sixth Annual Statistics Day Conference here.

Sellers' and purchasers' prices differ because of government subsidies, sales and excise taxes, and distribution costs, Subbarao said.

“For these reasons, it is, therefore, desirable that we move towards developing a Producer Price Index that measures the average change over time in the sale prices of domestic goods and services,” he added.

The RBI Governor said core inflation gives a better picture of price trends as it is less volatile than WPI-based inflation.

Core inflation is usually estimated by excluding food and energy prices from the basket of goods and services that represents a household's spending.

“The rationale for exclusion is that the prices of food and energy tend to fluctuate sharply and such volatility from the supply side, if passed on into the general price index, makes it difficult to interpret the overall trend,” he said.

“The surmise is that core inflation, being less volatile, gives a better sense of future price trends,” Subbarao said.

“If one takes a longer series of over three years, there is some evidence that core inflation does have statistically significant predictive power,” he added.

At present, apart from the WPI, India has several measures of inflation. The country also had four consumer price indices or CPIs – for Urban Non-Manual Employees, for Agricultural Labourer, for rural labourer and for industrial workers.

In February this year, the government introduced a new CPI series that has the CPI rural and CPI urban, and a combined CPI that takes in both with suitable weights.

Subbarao said the RBI in its annual report for 2009-10, had said that the potential output of the Indian economy may have dropped from 8.5 per cent pre-crisis to 8.0 per cent post-crisis.

“Latest assessment following the standard filtering technique suggests that potential output growth may have further fallen to around 7.5 per cent,” he said.

“Assessing India's potential growth rate, consistent with our objective of low and stable inflation, remains a challenge,” he added.