is more than mean plus / minus 1. 5 standard deviation over mean price change. trimmed mean : the trimmed mean procedure estimate price change of each commodities, arrange them in increasing order, calculate cumulative weight of the series and cut the commodities for which cumulative weight is less than 8 per cent or greater than 92 per cent. median : this procedure computes price change for all the commodities, arrange them in ascending order, calculate cumulative weight of the new series and take the inflation of the first commodity for which cumulative weight is greater than or equal to 50 per cent. reweighting : in this method, we compute price change, calculate standard deviation of price change for wpi - all commodities as well as each commodities over a period of time, calculate historical standard deviation for each commodity as the difference between wpi - all commodities standard deviation and standard deviation of that commodity. then, we calculate final weight as the reciprocal of historical standard deviation, multiplied by initial weight. * and * * indicate that the core inflation standard deviation is lower and significantly different from the standard deviation of headline inflation at 1 % and 5 % level of significance, respectively. iii. way forward 22. the divergence between alternative inflation measures complicates the conduct of monetary policy in india. accordingly, the reserve bank looks at all the measures of inflation, both overall and disaggregated components, in conjunction with other economic and financial indicators, to assess the underlying inflationary conditions. as indicated by governor dr. subbarao, “ the reserve bank has been constantly engaged in the refinements of the various price indices and would continue to provide the necessary support to the government to bring about further improvements in the measurement of inflationary conditions ”. 23. in the context of monetary policy formulation, it is important to have a robust primary measure of inflation at the national level. in this direction, the compilation of cpi ( urban ) and cpi ( rural ) could pave the way for a representative cpi for the country. there is also a need to augment the new series of wpi with a service price index to improve its overall coverage. in addition, it would be desirable to initiate steps to develop a producer price index ( ppi ) for the country. moreover, the representativeness of the various price indices could be enhanced by frequent updation of the base year so that it reflects the structural change in the economy. thank you. references barman, r. b. and a. k. nag (

##ness of wpi has reduced as it does not capture the price movement in the services sector which has a larger and increasing share of gdp – about 65 per cent in 2008 – 09. third, old base periods – for wpi ( 1993 – 94 ), cpi - unme ( 1984 – 85 ), cpi - rl ( 1986 – 87 ), cpi - al ( 1986 – 87 ) and cpi - iw ( 2001 ) – fail to capture the rapid structural changes in the economy. 2 divergence between wpi and cpi 8. why do wpi and cpis differ? they differ in terms of their weighting pattern. first, food has a larger weight in cpi ranging from 46 per cent in cpi - iw to 69 per cent in cpi - al whereas it has a weight of only 27 per cent 3 in wpi. the cpis are, therefore, more sensitive to changes in prices of food items. second, the fuel group has a much higher weight in the wpi ( 14. 2 per cent ) than the cpis ( 5. 5 to 8. 4 per cent ). as a result, movement in international crude prices has a greater bearing on wpi than on the cpis. third, services are not covered under wpi while they are, to different degrees, covered under cpis. consequently, service price inflation has a greater influence on cpis. 9. as the retail market receives commodities from wholesale market, it is expected that the change in the prices of commodities in wholesale market would normally transmit to the retail market. granger causality test in a vector auto - regression ( var ) framework using monthly wpi and cpis indicates that at the trend level cpis lag behind wpi by a month. there is also a long run cointegrating relationship between wpi and cpi. therefore, wpi and cpis in india may not move away from each other in the long - run if this observed relationship continues to hold ( chart 1 ). it may be mentioned that the system of national accounts ( sna ) 1993 has been impressing the national statistical agencies for regular updation of the base. in general, revision of base in every 5 years is an accepted principle in major developed and emerging countries. including manufactured food items. chart 1 long - run relationship between wpi and cpi inflation 10. in addition, annual inflation based on wpi, cpi - iw, gdp deflator, and pfce def