Page 554 - ES 2020-21_Volume-1-2 [28-01-21]

Prices and Inflation 181

Figure 19: CPI-C and WPI Inflation

Source: NSO and OEA, DPIIT
Note: The shaded region in the graph represents the period where Consumer Food Price Inflation has been higher
than Non-Food inflation

WHICH MEASURE OF INFLATION REFLECTED ECONOMIC
ACTIVITy BETTER IN 2020-21?

5.26 The previous two sections indicate the role of supply-side constraints, especially in the
case of perishable vegetables contributing to inflation. Since February 2017, CPI-C inflation
and WPI inflation have been moving more or less in tandem till beginning of 2019-20. After
this period, gap has emerged, which has widened in the recent months (Figure 19). Between
April-July 2020, WPI inflation has been in the negative region while CPI-C inflation has been
above 6 per cent. The major feature in this widening gap is that this has happened in a period
witnessing high food inflation. The shaded region in Figure 19 shows the period during which
CFPI inflation has remained higher than non-food inflation. The movement in CPI-C inflation
is quite contrary to the weak demand conditions prevalent in the economy in the recent months
owing to the COVID-19 crisis. Food items have a large weight of around 39 per cent in the
CPI-C index. This means that shocks to food prices can have large impacts on CPI-C inflation.

5.27 For the period April 2020 to November 2020, CPI-C is weakly related to IIP growth
while WPI inflation and CPI-C Core inflation are positively and strongly related to IIP growth.
Therefore, core CPI-C inflation and WPI Inflation, have been more in sync with the demand
conditions in the economy. During the period April 2020 to November 2020, the correlation
coefficient between WPI inflation and YoY growth in IIP is around 0.8 while the correlation
coefficient between CPI-C core inflation and IIP growth has been 0.9. The correlation between