INFLATION AT 6 PER CENT 

1. Context

Retail inflation for November has fallen below 6 per cent, the upper limit of the RBI’s extended comfort zone.

2. Key points

• According to data released by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) on December 12, retail inflation for November stood at 5.88 per cent.
• The inflation rate has moderated sharply over the past two months from 7.41 per cent in September to 6.77 per cent in October to under 6 per cent now.

3. What does it mean?

• The General Price level rose by 5. 88 per cent in November this year compared to where it was in November last year (2021).
• Retail inflation is measured by using the Consumer Price Index (CPI); that is why it is often called CPI-Based inflation.
• Essentially it maps the price level that a retail consumer faces against wholesale inflation, which is measured using the Wholesale Price Index (WPI).

4. Significance

• November is the first month since the start of the 2022 calendar year when the retail inflation rate has fallen below the 6 per cent mark.
• The 6 per cent mark is crucial because it is the highest level of the RBI’s comfort zone.
• By law, the RBI, India’s central bank, is required to maintain inflation at a 4 per cent level.
• However, the law provides a leeway of two percentage points on either side of 4 per cent in any particular month.
• This means retail inflation can be between 2 per cent and 6 per cent.
• However, retail inflation has been above 6 per cent through 2022.
• This has resulted in RBI having to explain to the government and Parliament why it failed to contain retail inflation.

5. The deflation rate

• The data suggest food inflation decelerated quite sharply in November.
• For instance, consumer food price inflation was growing at 8.6 per cent in September.
• Since then it has decelerated to 7 per cent in October and to just 4.67 per cent in November.

6. Geographical distribution of inflation in India

7. RBI on Interest rates 

• RBI has raised interest rates by 225 basis points since May in a bid to contain fast-rising inflation.
• To some extent, higher interest rates are beginning to have an effect by slowing down economic activity and curtailing overall demand.
• However, it is the softening in food inflation that has led to the moderation in headline inflation.
• Under normal circumstances, a 5.88 per cent headline inflation would have allowed the RBI to claim victory. But in the recently concluded monetary policy that was announced on December 7, the RBI appeared concerned about high core inflation, which is the inflation rate without the food and fuel prices.

8. Inflation in India

Retailed inflation soared to a 17-month high of 6.95% in March 2022, this is the third consecutive month that inflation remained above the % mark in 2022. 7.6% recorded in October 2020

Consumer Price Index is mainly rosed because of rising essential food items like 'food and oil', vegetables and protein-rich items such as 'Meat and fish'

Retail inflation is tracked by the CPI measures the changes in prices from a retail buyer's perspective

8.1 All about Inflation

Inflation: Inflation is the decline of purchasing power of a given currency over time. 

Inflation is the rate at which the value of a currency is falling  and, consequently, the general levels of prices and goods are rising

 

• Inflation is classified into three types: 1)Demand-Pull Inflation, 2)Cost pull inflation 3)Built Inflation
• The most commonly used inflation indexes are Consumer Price Index (CPI) and Wholesale Price Index (WPI)

8.2 Types of Inflations

 

8.2.1 Demand-Pull Inflation

This situation occurs when an increase in the money supply of money and credit stimulates the overall demand for goods and services in an economy to increase more rapidly than the economic production capacity

8.2.2 Causes of this Inflation 

1. Low unemployment
2. Depreciation of the rupee
3. Due to Fiscal Stimulus
4. Mismatch between Supply and Demand

8.2.3 Cost-push inflation

It is a result of an increase in prices working through the production process inputs. when overall prices increase due to an increase in the cost of wages and raw materials

8.3 Causes of this Inflation

1. Crude oil prices fluctuation
2. Defective Food supply chain/ Supply chain
3. food Inflation
4. Depreciation of currency

8. 3. 1 Built-in Inflation

This type of inflation occurs when workers demand higher wages. it is an adaptive expectation, people expect inflation will continue in future too. so they expect more wages of the management increases the wages it adds more to the inflation because there will be a mismatch in supply and demand again 

9. Types of Price index

 

9.1.1 Consumer Price index (CPI)

CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. It includes transportation, food, and medical care.

CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket

It calculates the difference in the price of commodities and services. its base year is 2012

There are four types of  CPI

1. CPI for Industrial worker (IW)
2. CPI for Agriculture Labour (AL)
3. CPI for Rural Labour (RL)
4. CPI Urban and rural combined

The first three are compiled by the Ministry of Labour and Employment, fourth is compiled by Nationational Statistics Organisation (NSO) under the Ministry of Statistics and Programme Implementation

9.1.2. Wholesale Price Index

It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses

It is used as an Inflation Indicator in India

Published by the Office of Economic Adviser, Ministry of Commerce and Industry

The base year for WPI is 2011-12

9.1.3 Producer Price Index

It is a Family of Indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time.

PPI measures price changes  from the perspective of the seller and differs from CPI which measures from the perspective of a buyer

For Prelims & Mains 

Source: The Indian Express