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SBI report suspects higher inflation; says NSO's June estimate 'clearly understated'

SBI report suspects higher inflation; says NSO's June estimate 'clearly understated'

SBI Ecowrap report says due to non-availability of data, index for sub-groups were imputed by simply using its last quoted price scaled up by the relative increase in CPI; it's a pure statistical exercise by NSO without even understanding problem that distorts and even underreports headline CPI, it adds

Retail inflation, measured based on Consumer Price Index stood at 6.09% for June Retail inflation, measured based on Consumer Price Index stood at 6.09% for June

The National Statistical Office (NSO) estimate of consumer price index-based inflation is "clearly understated", according to the latest SBI Ecowrap report. The report said following latest methodologies by constructing a 'COVID-19 basket', the CPI was coming out to be around 90bps higher than the NSO computation.

Elaborating further, it says due to non-availability of data, the index for the sub-groups, say for example 'Clothing & Footwear', were imputed by simply using the last quoted price of 'clothing & footwear' scaled up by the relative increase in CPI of the current month to that of the last observed month, March. "However, this is a pure statistical exercise by NSO without even understanding the problem that distorts and even underreports the headline CPI," it says.

With lockdowns, the fixed basket on which inflation is calculated is "totally irrelevant" as many of those typical items, particularly services are no longer available, it said.

"Our understanding is that the proportion of non-discretionary to discretionary card spends that was 65:35 in pre lockdown is now approx. at 80:20 with a pronounced downward bias for discretionary spends," said.

The report cites economist Alberto Cavallo's methodology used to estimate headline CPI in 17 countries by constructing a 'COVID consumption basket' and calculated the CPI numbers again and some trends were observed in the consumer expenditure. It was observed that the actual inflation was higher than the NSO estimate.

Harvard economist Alberto Cavallo, a co-founder of the Billion Prices Project, has proved by looking at credit and debit card transactions that spending across all categories have declined. He then assigns different weights to the basket of goods used to calculate inflation than the traditional statistic, reported Financial Times, adding that the idea is that, by allocating different weights, his 'Covid CPI' will provide a better idea of how prices are shifting for the average person.

Given this observation, the report has estimated the shifting consumption expenditures and thereby readjusted the consumer weightages in the CPI. "We call this measure SBI Computed COVID CPI. Based on our new weights, as per our SBI Computed COVID CPI, the actual headline inflation is much higher than the imputed inflation. Our Jun'20 inflation is at 6.98%, almost 90 bps higher than the imputed inflation of NSO," it said.

After a hiatus of two months, MOSPI has released CPI for June. Retail inflation, measured based on Consumer Price Index stood at 6.09% for June compared to 6.27% in May (imputed).

The pandemic has accelerated the recent global trend of disinflation, the SBI report says, adding that the average annual inflation rate plunged from 3% in February to 1.6% in April.

The SBI expects inflation to remain at elevated levels for the next few months due to supply-side constraints and labour shortage, rather than due to fiscal deficit and external factors, except crude. "However, the situation is extremely volatile and uncertain and the previously published numbers can see revisions," it added.

It also expects the forthcoming MPC (Monetary Policy Committee) decision will be a hard one to make for RBI. However, with real consumption set to be adversely impacted, governments and central banks in respective countries will be more concerned with the welfare implications of the pandemic on real consumption. "To that extent, while an August rate cut looks difficult/touch and go, we still believe RBI could be looking through the CPI numbers through the cycle and not at a point in the cycle," the report.

Also read: Retail inflation grew at 6.09% in June, food inflation eases to 7.87%