The fact behind the inflation numbers

If the difference between provisional and final wholesale price index (WPI) numbers is taken as a leading indicator, the headline inflation rate, which is hovering around zero, is unlikely to change direction.

An analysis of the two estimates over the last two years has revealed that the difference - which is now in the negative territory - is not narrowing. In fact for the week ended January 31 this year, the difference increased to 0.41 percentage point, compared with 0.37 percentage point in the previous week.

This phenomenon indicates that inflation rate is unlikely to reverse direction, say experts. Inflation for the latest week was estimated at 0.31 per cent as compared to 7.75 per cent in the year-ago period.

When the provisional inflation number is released within a fortnight, only a fifth of response is obtained from the manufacturing sector and this increase to two-thirds by the time final estimate is released after a gap of two months. Manufacturing sector accounts for nearly 63 per cent weight in WPI.

Because of low data coverage, the provisional inflation underestimates when the rate of price increase at a fast pace or vice versa.

"The difference between the two estimates could provide us information on future direction of inflation rate," said Sumita Kale, economist with Indicus Analytics, an economic research institution.

For example, the difference reached its peak of 1.86 percentage points in the first week of March last year, six months before the headline inflation number touched its historic high of 12.91 per cent in August 2008.

India's chief statistician Pronab Sen, in an earlier interview, said the difference between the two estimates is a good leading indicator of inflation in the coming months as widening of gap means inflation rate would increase at faster pace or vice versa.

However since first week of November 2008, the difference has moved into negative territory. At that time provisional inflation was near 9 per cent and the difference was around 20 basis points (one basis point is one-hundredth of a percentage point). This has now widened to 41 basis points for the week ended January 31, 2009, the last date for which final estimate is available.

Experts are predicting inflation rate to fall below zero within the next 3- 6 weeks. However they rule out a period of sustained deflation, marked by negative inflation number.