Why 8th CPC needs better inflation measurement, Pg15.

Key Highlights:

• The 8th Central Pay Commission (CPC) terms of reference were approved on October 28, with 18 months to submit recommendations.
• The Statistics Ministry released a discussion paper on October 30 seeking feedback on changes to housing inflation calculation in the Consumer Price Index (CPI).
• The current CPI calculation uses House Rent Allowance (HRA) foregone by government employees as a proxy for rent, causing distortions.
• The Ministry of Statistics and Programme Implementation (MoSPI) proposes excluding government accommodations and using monthly rent data for CPI calculation.

Detailed Insights:

• The 8th CPC's recommendations could significantly impact India's headline inflation, particularly housing inflation, if the CPI calculation isn't revised.
• The current method of using HRA leads to artificial inflation changes when government salaries are revised, as seen after the 7th CPC implementation in 2017.
• After the 7th CPC, HRA increased by 105.6 percent, causing housing inflation to rise from 4.7 percent in June 2017 to 8.45 percent in June 2018, while overall CPI inflation rose from 1.46 percent to 4.92 percent.
• Current CPI housing inflation averages 3 percent, while the RBI's House Price Index shows a 6 percent rise and MagicBricks' Rental Index indicates a 20 percent quarterly increase, highlighting discrepancies.
• Proposed changes by MoSPI aim to make housing inflation data more representative of actual rental inflation by excluding government housing and collecting monthly rent data.
• The new CPI series, expected to be released starting in February, will incorporate these changes, potentially leading to a more accurate reflection of rental inflation.

Key Concepts Involved:

• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• House Rent Allowance (HRA): A component of salary given to employees to meet the cost of renting accommodation.
• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.