Inflation in India: Causes and Consequences

Context:  According to data released by the National Statistical Office (NSO), retail inflation increased to 6.5% in January 2023.

About Retail Inflation

• It is measured by the consumer price index (CPI). The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.
• CPI measures retail inflation by collecting data on the prices of goods and services that are consumed by the retail population of the country.
• The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels.
• Among the major States, Telangana recorded the highest inflation in January at 8.6%, followed by Andhra Pradesh (8.25%), Madhya Pradesh (8.13%), Uttar Pradesh (7.45%) and Haryana (7.05%).

Causes for Spike in Inflation

• Higher Food Inflation: Consumer food prices increased to 5.94% from 4.2% in December 2022.
  • Cereals inflation surged from 13.8% in December to 16.1%;
  • Milk products accelerated from 8.5% in the previous month to 8.8%;
  • Spices jumped from 20.3% inflation to 21.1% in January.
  • Inflation in eggs sped from 6.9% in December to 8.8% in January, while the pace of price rise in meat and fish rose from 5.1% to 6.04%.
• Core inflation: It has increased to 6.2% in January from 6.1% in December.
  • It is a measure of inflation arrived at by removing the prices of food and fuel.

CPI and Repo Rate

• CPI is an essential tool for RBI as it looks after the monetary policies of the country.
• The framework by RBI requires it to keep the inflation rate around 4% however it can fluctuate anywhere between 2% and 6%.
• The primary motive of RBI is inflation control, while it may change from time to time depending on the decision of the monetary policy committee.

Impact of Increase in Inflation

• Increase in Repo Rate: Reserve Bank of India (RBI) in February 2023 Monetary Policy meeting raised the repo rate by 25 basis points (bps) to 6.5 per cent in its fight against inflation.
  • RBI raises the repo rate when it believes that inflation is not in control.
  • Higher interest rates drag down overall demand for goods and services by making loans costlier. Lower demand is expected to cool down inflation.
  • If inflation stays persistently high (‘sticky’), it would necessitate the RBI to keep raising interest rates

Sticky Inflation

• Inflation being sticky essentially means that inflation is taking longer than expected to fall.
• Higher food and fuel prices have spiralling impact on the broader economy and made other things costlier.
• However, India is not the only country facing sticky inflation.
• Many other countries such as the US and countries in the euro zone — are also struggling to come out from sticky inflation.

CPI vs. WPI

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