The Error in the CPI, Which Precludes It Use in Inflation Targeting

Abstract

In this paper, we examine the trends in the CPI and the core part of the CPI to bring out a grievous error in the core CPI. The core in certain years shows a jump of as much as 7% in certain quarters due to the error in the way the rent prices are computed. During the periods following the Pay Commission implementation, the “ rent” prices rise in the CPI, because the rents for the entire population are imputed from the “House Rent Allowance” accorded to government employees. “Rents” in the CPI have jumped up by as much as 35% in certain quarters, hugely overestimating the true inflation. This vitiates any use of the core CPI for monetary policy including inflation targeting. This will-o’-wisp that the RBI chased, had no doubt constrained growth in India.

Keywords: India, Inflation, Inflation-Targeting, Core Inflation, CPI, Monetary Policy, Growth, Performance

JEL Classification: E3, E4, E5, E6, E7, O2, O53