Rural Inflation Stays Over 5%, Urban Food Inflation Nears 9%

News Excerpt:

The National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation released CPI inflation data for May on June 12.

More about News:          

  • May is the fourth month in a row that food inflation has been over 8.5%.
  • The inflation gap between urban and rural areas has been noticeable for the third month in a row. Rural households experienced a 5.3% price increase in May, while urban retail inflation was at 4.15%.
  • In May, India's overall consumer price inflation slightly dropped to 4.75% from 4.83% in April, marking a one-year low.

  • However, food prices continued to rise, especially affecting urban households with an 8.83% increase in food inflation.

Inflation Overview

  • Although the Consumer Price Index (CPI) is on a downward trend, frequent shocks in food prices have slowed down this process.
  • Despite some easing, the prices of pulses and vegetables stayed high, especially during the summer.
  • Fuel prices dropped mainly due to a cut in LPG prices in March.
  • Core inflation, which excludes volatile items like food and fuel, has been decreasing for eleven months. 

Concerns and Positive Signs

  • The hot summer and low water levels could hurt the summer crops of vegetables and fruits.
  • Global food prices are rising, and the cost of industrial metals has gone up significantly this year. These trends could increase production costs for businesses.
  • On a positive note, a forecast of an above-normal monsoon could help the main (kharif) crop season.
  • Wheat procurement is higher than last year, and stockpiles of wheat and rice are plentiful, which might ease food inflation, especially for cereals and pulses.
  • The outlook for crude oil prices remains uncertain due to geopolitical issues.

Inflation Forecast by RBI

  • Assuming a normal monsoon, The RBI projected CPI inflation for 2024-25 at 4.5%.
  • Even though retail inflation has been below 6% since September 2023, it is still higher than the RBI target of 4%.
  • The progress of the southwest monsoon is expected to influence food inflation over the next few months.
  • A favorable base effect is expected to last until July 2024, which might help counter potential price increases.
  • The RBI's decision to cut policy interest rates will likely depend on food inflation trends in the coming months.

Measurement of Inflation

Wholesale Price Index (WPI)

  • The WPI tracks the change in prices at the wholesale level, where goods are traded in bulk.
  • It is published monthly by the Ministry of Commerce and Industry.
  • WPI includes the price change of goods only.
  • There are around 697 items in the WPI basket.
  • The present base year for WPI is 2011-12.

Consumer Price Index (CPI)

  • The Consumer Price Index (CPI) tracks the change in prices paid by consumers in the retail market. 
  • Types of CPI
    • CPI - Rural: Measures the price change of the commodity basket consumed by the rural population.
    • CPI - Urban: Measures the price change of the commodity basket consumed by the urban population.
    • CPI - Combined: Computed by combining the CPI Rural and CPI Urban indices.
  • The base year for these indices is 2011-12, and they are published monthly by the National Statistical Office (NSO).
  • The weights in the CPI basket are based on consumer expenditure on various items.
  • 'Food and beverages' have the highest weight at 45.86% in CPI Combined, making fluctuations in food prices significantly impact the CPI.

Consumer Food Price Index (CFPI)

  • CFPI measures the change in retail prices of food items consumed by the population.
  • It is released monthly for rural, urban, and combined populations.

Core Inflation

  • Core inflation is a measure of headline inflation that excludes volatile components such as food and fuel items.

The Monetary Policy Framework

  • In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
  • Inflation Target: 
    • Under Section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in five years and notifies it in the Official Gazette. 
    • Accordingly, on August 5, 2016, the Central Government notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. 
    • On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period – April 1, 2021 to March 31, 2026.

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