The Economic Survey has made a strong pitch for shifting of focus from consumer price-based inflation (CPI) to core inflation and has called for revision of the base year of the CPI.
"Sole focus on CPI-C inflation may not be appropriate for four reasons. First, food inflation, which contributes significantly to CPI-C is driven primarily by supply-side factors. Second, given its role as the headline target for monetary policy, changes in CPI-C anchor inflation expectations. This occurs despite inflation in CPI-C being driven by supply side factors that drive food inflation. Third, several components of food inflation are transitory with wide variations within the food and beverages group. Finally, food inflation has been driving overall CPI-C inflation due to the relatively higher weight of food items in the index," the survey says.
"While food habits have undergone revisions over the decade since 2011-12, which is base year of CPI, the same is not reflected in the index yet. The base year of CPI therefore needs to be revised to overcome the measurement error that may be arising from the change in food habits," the survey added.
For all these reasons, a greater focus on core inflation is warranted. Further, given the significant increases in e-commerce transactions, new sources of price data capturing e-commerce transactions must get incorporated in the construction of price indices, according to the survey.
To avoid supply side disruptions that cause inflation seasonality in vegetables, food, CPI-C and in inflation expectations, a system needs to be developed to reduce wastage and ensure timely release of stock, the survey pointed out.