The right index

Economists follow many sets of data. Some of those may seem irrelevant to the layperson. For example, you could live out a comfortable life without knowing anything about the money supply or foreign exchange rates. But some indicators have an obvious impact on daily life. These are considered politically sensitive for that very reason. One such typical indicator is inflation. Everyone understands mehngai. Fear of inflation drives much political policy. Another politically sensitive indicator is employment. Everybody has an instinctive understanding of how employment affects the economy and society. Inflation and employment also affect each other. High employment is desirable. Low inflation is desirable. But high employment can lead to high inflation. This is for two reasons. First, everybody has money in their pockets, so demand for goods and services is high. At the same time, since everybody is employed, there is less slack capacity to meet demand. So prices rise. Therefore, policy makers have to find ways of balancing them to maximise employment and minimise inflation. Obviously, they need reliable data to make effective policy. Sadly, those data are lacking. Inflation data have improved somewhat, even though there are some major problems. Employment data are a black hole. India uses two inflation-tracking indices. The Wholesale Price Index (WPI) tracks the prices of manufactured goods at the factory gate. It also tries to use the wholesale prices for agricultural and non-agricultural commodities and mined products. This is quite complicated. Agri products are sold at different wholesale rates in differen

This article was originally published on May 19, 2016.