Consumer Price Index
Context:
- Governor of the Reserve Bank of India (RBI), Shaktikanta Das, stated last week that “recurring and overlapping food price shocks” continue to be a threat to headline consumer price index (CPI) inflation.
Inflation: What Is It?
- Price increases are known as inflation, which is also known as the gradual loss of purchasing power.
- The average price increase of a selected basket of goods and services over a given time period can be used to determine the rate at which buying power declines.
- The increase in costs, which is sometimes stated as a percentage, implies that a certain amount of money may now buy less than it did in previous times.
CPI: What is it?
- One price index called the Consumer Price Index (CPI) is used to track changes in the retail prices of goods and services that a certain demographic group in a given area consumes.
- The CPI basket, which has 460 items in the urban basket and 448 items in the rural basket, includes a wide variety of products. The cost of living or the utility that consumers obtain at a particular level of their income, prices, and preferences is thus represented by this enormous basket of products and services.
- It is regarded as a key economic indicator and is frequently used as a deflator in national accounts, a tool for monitoring price stability, and a barometer of inflation.
- Every month, the Ministry of Statistics and Programme Implementation, through the National Statistical Office (NSO), separates and collects the CPI for the combined, rural, and urban sectors.
Headline Deflator:
- The Consumer Price Index (CPI), which is published on a monthly basis by the Bureau of Labour Statistics, measures headline inflation.
- No adjustments are made to headline inflation to eliminate extremely volatile data, such as those that are subject to change regardless of the state of the economy.
- Changes in the cost of living are frequently closely linked to headline inflation, giving customers in the marketplace valuable information.
- Seasonality and the frequently volatile components of food and energy prices—which are subtracted from the headline figure in the core Consumer Price Index (CPI)—are not taken into account.
The core inflation rate
- The change in prices for goods and services that excludes those from the food and energy sectors is known as core inflation.
- These items are not included in this estimate of inflation because of their significantly more fluctuating costs.
- The consumer price index (CPI), a gauge of prices for goods and services, is most frequently used to compute it.
Current inflation situation:
- According to the most recent CPI data, overall annual retail inflation for October was 4.87 percent, down from 7.44 percent in July for the third consecutive month.
- Furthermore, October saw a 43-month low of 4.28 percent for “core” CPI inflation, which does not include increases in the prices of food and gasoline.
- Furthermore, considering the negative gasoline and mild inflation of -0.39%, the issue is with food prices.
- Food inflation was greater than the overall CPI inflation rate, at 6.61%. However, some food ingredients are unstable, like vegetables, which might experience supply shocks during certain seasons. This can lead to substantial inflation, as was the case recently with onions and tomatoes in July and August.
- With the introduction of new crops, these frequently self-correct; the inflation of vegetables has already fallen, falling from 37.4% to 2.7% between July and October.
Reason for worry for the government and RBI:
- Prior to the national elections of the following year, the RBI and the government should be particularly concerned about the most sticky aspects of food inflation.
- These are specifically related to pulses and cereals, or dal-roti. Since September 2022, retail cereal inflation has been in double digits for 14 consecutive months, averaging 10.65%.
- In pulses, this has been the case for the last five months, with the current inflation rate of 18.79 percent being the highest since August 2016.
- It is obvious that this is related to a subpar monsoon.
- One shouldn’t hold too much hope for the rabi crop either, as the post-monsoon season (October to December) rainfall has so far been 26% below average and El Niño’s impacts are expected to persist into spring and beyond.
The government’s endeavours and future path:
- The Narendra Modi administration has done a good job of managing the relatively comfortable wheat and rice supplies with the Food Corporation of India. This has been accomplished by increasing open market sales to keep prices down and returning the original 5 kilogramme/person/month allotment for ration cards, which was 10 kg during the Covid period.
- It needs to increase supply by eliminating the 40 percent import charge on wheat and the 50–60% import duty now applied on chana (chickpea) and yellow/white peas.
Way Forward:
- Farmers may be against tariff reductions, but the government should be more concerned about double-digit dal-roti inflation from an economic and political standpoint.
