Correct price index

Abstract

Monetary policy should take output into account directly, not switch focus to WPI. One vital decision for central bankers is which single price index (and corresponding measure of inflation) they should focus on. The phrase “focus on” is used instead of the word “target”, since focusing on a certain measure does not imply that it is being mechanically targeted.

Across the world, central banks choose the consumer price index. Their primary task is to preserve the domestic value of the currency. It is the legal, and in some sense moral, responsibility of the central bank to ensure to the public that the contracts they enter into are protected against changes in the aggregate price level. It is the CPI that enters into wage and financial contracts either via dearness allowance (DA) adjustment or other legal clauses, or via individual adjustments based on inflation expectations. The DA arrears that the Seventh Pay Commission will dole out at some point will be based on consumer prices. On these grounds, the CPI can also be called the correct price index. Read more at: https://indianexpress.com/article/opinion/columns/correct-price-index/