Inflation....my foot !!

Inflation and Inflammation don't only sound similar.. but are !! Both are irritating, painful and can be more dangerous when they are absent. The government releases a % data every Thursdays and for the last six months we have been saying WTF !! When we return home penniless no matter how much we carry, how can this rate of inflation be justified. Well, our pockets are torn may be , or the government is lying or both.
Lets take a hypothesis, being a common man with no right to challenge the GOVERNMENT, that our pockets are torn and the find the value of chi square. Okay, its too complicated. Lets just see how our pockets got ripped of. Lets say I am a common, average middle class Indian. This description enables me to be the one who pays maximum taxes, lives a scared life, gets no privileges and dies of swine flu. Life sucks and I do too and then we call it even. It also gives me a privilege to get a salary so that I have a portion of my salary in the 30% slab. (Come on ! Are you kidding me ! you are poor if you don't earn that much. Last years inflation has assured that much.) So I pay my taxes and try avoiding greasing the palms of the bureaucrats. I pay and pay and pay. I pay my taxes, for my insurance, for my PF, for my insurance plans, for my transport, for my food, for power, for Ambanis to get rich...I keep paying. And one day I am left with nothing. The government suspects that I have hidden cash in my toilet. It rips apart the house, the life and at last my pocket.I have no money in my pocket, I don't have a pocket in fact and everything seems to be costlier and the reports say that the inflation is actually nearing Zero !! I absorb it.. its a government figure after all and how can I doubt it ?
Well, for once I dared to doubt it. I tried to answer to myself what this inflation stuff really was and why does the government keep saying that its low when I have to pay so much for everything and also that the common wisdom says that inflation is somehow directly related to prices.
What is inflation? Its the indicator (in case of India) of the percentage increase/decrease of prices taking the year 1993-94 as the base year. Yes you are right. The government thinks that our consumption pattern is the same as it was more than 14 years ago !! And that is on Wholesale Price Index (WPI). Now, WPI takes into consideration Laspeyre's formula to get a weight to the items the government thinks that we care about. Don't blame the guy, he just put the formula like Duckworth and Lewis. He never knew that the fixed weightages will remain fixed for as long as 14 years when the economy is changing at as rapid rate as it is. Whats wrong with fixed weights ? For one, it still thinks that you use Sangram washing powder (haven't heard that name!!) and cook your food in Dalda (which even HLL thought was useless and sold it off !!). It doesnt consider that the consumer replace products when the prices and substitute change. So according to it you are still using Binaka/Forhans tooth paste, when I have stopped using Forhans since the day Gavaskar stopped advertising for it. Secondly, it also thinks that people still use the same product, even if they get a better product for a slightly higher price. So, when I gulp down VAT 69, the index still ends up calculating my drinking habits in 5 brands that were there in 1993-94. I think, this is a yardstick to please a friend of mine who thinks Khoday's is the yardstick. Thirdly, it doesn't think that people shift to lower price products. As if, we are left with too much money after paying the taxes. Fourth point is that it thinks that human beings are dumb race. We dont innovate !! We dont bring in new technology to the front that can replace the older one. So as per Indian inflation standards, we still use pagers more than cell phones. Yes, you heard it right. Leave alone the drastic changes in the services that we see everyday as they become a part of our lives. As if that was not enough, we think that WPI is the correct measure of inflation. Why ? I mean Why ? Whats wrong with WPI ?
Lets answer what WPI is and the answer will become a bit clearer. It tracks the prices of 435 items, comprising of 98 primary articles, 19 items of fuel, power, light and lubricants and 318 manufactured items. The first flaw appears when we consider that it reflects the traded value of the items and not the retail values and hence the price fluctuations are some what moderated. If I had the same bargaining power as a trade partner, I would have some savings today. May be not , but you sure would have one. The industrial commodities (such as iron ore, bauxite,coking coal) is something I stopped purchasing when I was 2 years old. Before that I never purchased anything. So the weights attached to these commodities may well be zero for me. The cost of living is more accurately reflected in CPI though that too is not a correct measure. But I would rather miss the goal by hitting it so that I atleast get a corner rather than hitting it 10 feet above the goal post. Another shocker is that services like rail and road transport, health care, postal, baking services and insurance doesnt come under the WPI basket. Unorganised sector has been a neglected kid for a long time in terms of policies. WPI fits in the policies pretty much, neglecting almost 35% of consumption of Indian consumers. So much so for the process.
Lets consider that the process is perfect. Its not like the Hindi of a certain lady who runs the country, not like our democracy, not like the map of India that we have been made to study. Its up there with Nadia. (Its sad that we are a country of 125 crores and I turn to Russia for an example of perfect.) We still need data to calculate the % variance from the sacred year 93-94. So how do we get the data ? The transactions that are to be considered for price calculations are not defined. We, who are brought up in schools defining more things than we learn cant define transactions that helps us plan policies. 66.66% of the price quotes are used from the metros. Hello !! India mostly is outside the metros, you see it every five years, remember ? Add to that the price reporting from the manufacturers are voluntary. If I had a company, I would have thanked the government. I am sure they are thanked in the closed walls. The process is screwed up and the data is too and unfortunately two minuses dont make a plus here.
Can we look for alternatives for a change (unlike what we do in selecting our representatives)?
There are some figures that the same government publishes. Under-markets it and makes it very irregular. This is called Consumer Price Index for Industrial Workers (CPI-IW) and also CPI-AL (Agriculture Labourers). I being a "Manager" in a private sector company fall out of its purview. The problem with CPI is that it can be calculated for a homogeneous set of consumers only. That is because the consumption pattern change with a particular set of consumers, depending upon disposable income, locality, access to subsidised products and services etc etc. So, like our leaders this way divides us in a lot of sub-categories. Given their love for this method, netas should have adopted it. This method also has very questionable data. And if you are expecting that the updation of the consumption pattern is more not updated here too, you probably are still underestimating. The last updation of the patters for CPI-AL happened in 1983 !! 26 years down the line, the agricultural labourers are still considered to be living the same life. I think this was the wish of our "leaders"- no change in living standards of ALs for 26 years. Some pretty messed up guys changed it and the government cant be blamed for that. CPI-IW is more updated though. Are you shocked? Dont be, because this data is used for DA calculations and if not updated there is a chunk of vote to be lost. Still delaying the truth is a decent way to prevent it having an effect. When WPI is published in 2 weeks time, CPI-IW is published every 2 months.
The indices, CPI-IW and CPI-AL also holds an importance which cant be neglected. Not if, you want to say to the people - " Hey you are rich, please pay up taxes". These indices are linked to 1979 poverty line to calculate the new poverty line. Lower these figures, lower the number of poor in the country. This is a nationalistic approach and we must commend it. It will result in the elimination of poverty from the country, sooner or later.
But the CPI, inspite of all the efforts put in by the government to curb it on paper, has been above 10% !!. Just imagine what it actually is with the right set of data. And this is the index that generally effects the poor, as it has more weightages to food articles and other necessities of lives. So while trying to please the industry with the constant WPI, we have reached a stage where the CPI is no longer relevant. No to the government atleast. Its amazing how the US data covers 87% population for the calculation of inflation, where are we almost miss that much for the same purpose.
Our obsession with keeping the WPI may be linked to the fact that it leads to the downstreaming a lot of financial factors. Low inflation means the interest rates can remain lower, the consumers spending more and not more than 0.1% of the population gaining from it. I wouldnt be complaining if I was in that percentage.

PS: I am using a wireless modem to post this which I am sure doesnt figure in any format of inflation calculation. Therefore anything written about inflation above cant be held in the court of law ( Haa !!) against me