What price accuracy?

If the unchecked rise in inflation isn’t reason enough for worry, we now have another: the official wholesale price index (WPI) is often off the mark. It is something every housewife in the country has always suspected, but for the wrong reasons. Her assumptions are based on the rapid increase she sees in the prices of everyday necessities such as vegetables (between March 31 and August 7, these prices rose 58 per cent). But she is unaware that these items have a small weight of just 1.5 per cent in the WPI. But while the weights used for different items in the WPI and the consumer price index can be debated till the cows come home, what’s really worrisome is recent evidence that the data may be outdated. According to news reports published in this newspaper, only around 40 per cent of the price data to be collected from various mandis and factories is actually sent to the authorities. While computing the index, the missing data are either kept the same as in previous weeks or perhaps inflated using some makeshift numbers.In plain terms, this means the WPI is part guesswork, part fiction. Not surprisingly, there is now an increasing gap between provisional and final inflation numbers. While this is not in itself noteworthy, the gap has begun to widen. From a range of 0.1 to 0.3 per cent since April this year, the gap between provisional and final WPI figures has suddenly jumped to almost 1 per cent. In terms of impact on consumer and market sentiment, it is the provisional data that count. In recent weeks, the bond markets have been skittish precisely because of the provisional data, and price movements have been volatile. If inflationary expectations have been bolstered (or suppressed) by faulty data, it could also be skewing the policy response.To be sure, there’s no use blaming just the WPI’s compilers for this. The malaise run deep and affects almost all data sets in the country. Budget numbers generally get changed from year to year. What looks like a fiscally prudent Budget at the time of presentation becomes quite the opposite when viewed a year or two later. And it’s not just because of fluctuations in fiscal numbers; GDP numbers tend to get revised as often. For years, the country has had to face massive fluctuations in sugar prices as estimates of acreage under sugarcane have gone wrong each time, not leaving enough time or information for the government to figure out what to do in terms of increasing or restricting imports. Whether it’s data on the number of the poor in the country (13 per cent according to Surjit Bhalla’s estimates versus the official figure of 26), or the number of the unemployed (2.2 per cent according to Montek Ahluwalia and 7.3 per cent according to S P Gupta), the fact that the variations are so large makes policy making little more that a shot in the dark.The government is reportedly planning to work out more meaningful inflation indices. The right way to construct a more representative index is not merely to look at consumption patterns and weights, but also check out the entire information chain through which data are obtained and collated. Success depends on understanding the gigo principle: garbage in, garbage out. Failure to recognise gigo is what resulted in the recent deluge of misleading inflation numbers.