Why in the News? 

AAZData released showed that Retail Inflation had edged marginally upward last month.

What is Inflation?

• Inflation, as per the definition provided by the International Monetary Fund, represents the pace at which prices rise within a specified timeframe, covering a comprehensive assessment of general price escalations or those about particular goods and services. To measure the inflation there are different types of inflation index.
• An Inflation Index is a statistical measure used to track changes in the overall price level of goods and services in an economy over a specific period. It quantifies the rate of inflation by comparing the current prices of a selected basket of goods and services to their prices in a base period.

In India, there are primarily two types of inflation indices used to measure price changes:

• Consumer Price Index (CPI): The CPI measures changes in the prices paid by urban and rural consumers for a basket of goods and services. It provides insights into inflation experienced by households and is divided into various sub-indices based on categories such as food, fuel, clothing, housing, transportation, medical care, recreation, and education. The Government of India releases multiple CPI indices, including:

1. CPI for Industrial Workers (CPI-IW)
2. CPI for Agricultural Labourers (CPI-AL)
3. CPI for Rural Labourers (CPI-RL)
4. CPI for Urban Non-Manual Employees (CPI-UNME)
5. CPI for Rural (CPI-R)
6. CPI for Urban (CPI-U)

• Wholesale Price Index (WPI): The WPI tracks changes in the prices of goods at the wholesale level. It includes the prices of commodities traded in bulk such as agricultural products, minerals, crude oil, manufactured products, and electricity. The Office of the Economic Adviser, under the Department for Promotion of Industry and Internal Trade (DPIIT), releases the WPI every month.

What is Retail Inflation? 

• Retail inflation, also known as Consumer Price Index (CPI) inflation, tracks the change in retail prices of goods and services that households purchase for their daily consumption. CPI is calculated for a fixed basket of goods and services that may or may not be altered by the government from time to time.
• How it is Calculated?
  • A representative basket of goods and services is selected to represent the typical consumption patterns of households
  • The cost of the basket of goods and services is calculated for a base period.
  • The CPI is calculated by dividing the cost of the basket in the current period by the cost of the basket in the base period and multiplying by 100.
  • The inflation rate is calculated by comparing the CPI of the current period with the CPI of the base period.

Key points as per AAZData released by the National Statistical Office:

• Retail Inflation Data: The National Statistical Office reported that retail inflation in India increased marginally, rising to 5.69% in December from 5.55% in November, primarily driven by higher food inflation
• Cause of inflation: RBI Governor Shaktikanta Das had anticipated the rise in inflation due to risks in food prices, cautioning about potential second-round effects
• Food Inflation: The Consumer Food Price Index surged to 9.53% in December, up from 8.7% in November, with notable inflation in cereals, vegetables, pulses, sugar, and spices
• Industrial Production: The index of industrial production slowed to 2.4% in November, partly due to the base effect, with a 6.4% increase in industrial output for the first eight months of the year (April-November)
• Monetary Policy Committee (MPC) Actions: The MPC maintained the status quo on rates and stance in the last meeting, focusing on withdrawing accommodation to align inflation with the target of 4%
• Future Monetary Policy: There are discussions within the MPC about the necessity of an interest rate cut to prevent excessive real interest rates, especially as inflation is projected to moderate in the coming quarters

Way Forward

• Monetary Policy Adjustment: The Reserve Bank of India (RBI) could consider implementing a cautious monetary policy stance, possibly by tightening monetary policy through measures such as raising the repo rate. This would help curb inflationary pressures by reducing liquidity in the economy and making borrowing more expensive.
• Supply-Side Interventions: The government could focus on addressing supply-side constraints in the agricultural sector to mitigate food price inflation. This might involve measures such as improving infrastructure, increasing agricultural productivity, reducing post-harvest losses, and enhancing market efficiency through better distribution networks.
• Fiscal Policy Support: The government could also provide fiscal support to sectors facing supply-side disruptions or demand constraints, which could help stabilize prices and support economic growth. Targeted fiscal measures, such as subsidies for essential commodities or infrastructure investments, could be considered to address specific challenges contributing to inflation.

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