gdp + 0. 90 * in m3 * significant at 1 % corresponding error correction ( ec ) model including crude oil price and rainfall as exogenous variables is estimated as : wpi - inflation = – 0. 038 * ec + 0. 766 * growth in money supply ( – 1 ) + 0. 063 * growth in crude oil price + 0. 139 * deficit in rainfall. * significant at 10 % the error correction term is negative and the speed of adjustment coefficient for non - agricultural gdp is significant at 1 % and that of wpi at 5 % with negative signs. this implies that in the short - run changes in price cause changes in money supply which, in turn, causes changes in prices. this pattern is more pronounced when plotted against the actual inflation rates ( chart 8 ). iv. conclusions the above discussion leads to the following major conclusions. first, the new series of wpi inflation marks a major change in terms of scope and coverage of commodities and is more representative of the underlying economic structure. as per the new series, the manufactured products inflation is lower than what was seen on the basis of the old series. the food price inflation, on the other hand, is higher than what was seen on the basis of the old series. the high level of food prices is indeed a matter of concern as the prices of protein - based items, which have a higher share in the consumption basket, are showing larger increases. moreover, there is continuing shortage of food items such as pulses and edible oils. if the supply response doesn ’ t improve, there is a risk that food price inflation could acquire a structural character. second, historical data show that india is a moderate inflation country. but there have been phases of sharp spikes in inflation emanating from war, drought and commodity price shocks. supply shocks when accompanied by demand pressures further amplified inflationary pressures. but the inflation rate has reverted to its trend following policy response and improved supply conditions. in the periods of high inflation, monetary policy responded with a combination of available policy instruments through changes in policy interest rates, cash reserve ratio ( crr ), statutory liquidity ratio ( slr ), and in the earlier regime through increased in administered interest rates and credit control. third, the volatility as well as incidence and duration of double digit inflation has reduced over time. inflation control since the mid - 1990s has been particularly successful which can be attributed to wide ranging reforms which have improved the macro - policy framework and

7 percentage point and manufactured products by 1. 2 percentage points. there has been a reduction in weightage of primary food articles and manufactured food products by 2. 6 percentage points in the new series to 24. 3 per cent from about 26. 9 per cent in the old series. second, notwithstanding a significant reduction in weightage, the food inflation in the new series is higher than in the old series. this is because of change in the consumption basket in favour of protein - rich items such as egg, meat and fish where price rise has been high apart from milk and pulses. third, the non - food manufactured products inflation is lower in the new series than in the old series. this is because of a substantial overhauling of the basket with the introduction of a number of new items. for example, the new series has 417 new commodities of which 406 are new manufactured products ( chart 1 ). fourth, the new series has wider coverage. for example, the number of price quotation has increased from 1918 in the old series to 5482 in the new series. the new series, therefore, is better representative of overall commodity price inflation. ii. long - term inflation trend the wpi series is available from the year 1952 – 53 onwards though the base year has undergone revisions from time to time. the monthly year - on - year inflation for the 56 years from 1953 – 54 to 2009 – 10 is plotted in chart 2. a visual impression of chart 2 suggests the following. first, inflation was quite volatile in the initial three decades of the 1950s, 1960s and 1970s. but the volatility has reduced in the subsequent decades even with occasional spikes in inflation. second, since the high inflationary phase of the mid - 1990s, the inflation rate has moderated. it has remarkable stability coinciding with great moderation globally except for the recent two brief episodes of double digit inflation each persisting about 5 months in june – october 2008 and then during march – june 2010. going by the current experience of 5 – 6 months of double digit inflation as high, one can trace 9 such episodes in the last 56 years. out of these 9 episodes, double digit inflation lasting beyond a year occurred on 5 occasions. the most prolonged one lasted for 30 months during october 1972 to march 1975. the last such high inflation was in the mid - 1990s which lasted 15 months between march 1994 and may 1995. the reserve bank responded to the phases of high inflation through available policy instruments ( table 2