Retail Inflation spikes to a 5-month high of 5.59% in December

Retail inflation in India, measured by the Consumer Price Index (CPI) increased to a five-month high of 5.59% in December, based on the latest data released by the government. The rising inflation levels, especially in the midst of the third wave of the pandemic and weakening aggregate demand, are expected to further squeeze disposable incomes making things even more challenging for the monetary policymakers.

RBI had projected the CPI inflation at 5.1% for Q3'21. At 5.59%, retail inflation in December is dangerously close to RBI’s comfort boundary of 6%. In its bi-monthly monetary policy review last month, RBI had kept its key policy rates unchanged for the ninth time in a row, maintaining an ‘accommodative stance’ to support growth. The rising inflation may compel the RBI to take a harder stance on maintaining the current interest rates at its meeting in February. 

Input cost pressures and GST increase on select items in January are likely to keep core inflation under pressure in the next few months just as the base effects turn adverse.

Higher inflation levels due to price increase were felt particularly in Fuel with a 10.95% increase in December, though lower than the 13.3% increase in November. Transport & Communication which comprises 7.6% of the overall weight in the consumer price basket recorded a price rise of 9.65% in December, almost as much as in November. These categories have the potential to exert cost pressure on various other input items. Inflationary pressure in Housing eased marginally from 3.7% in November to 3.61% in December.

Food Inflation

Food Inflation, determined by the Consumer Food Price Index (CFPI), measures changes in retail prices of food items consumed by the population. CFPI commodities comprise 39.05% of the entire CPI basket.

Food inflation rose to a 6-month high of 4.05% in December, a sharp incline from 1.87% in November. The rise in December's food inflation is a result of an increase in prices of almost all food items except vegetables. Prices of edible oil climbed 24.3%, meat and fish prices increased by 4.58% while vegetable prices fell by 2.99%.

States-wise Inflation

Haryana recorded the highest level of increase in retail prices at 6.64% in December, closely followed by Tamil Nadu at 6.61%. Retail price pressure was the lowest in Odisha at 3.48%, followed by Punjab at 3.55%.

Reference Reading

What is retail inflation?

Retail inflation, also called consumer inflation, is a general rise in prices of consumer goods where a unit of currency effectively buys lesser goods and services, resulting in an overall drop in purchasing power in an economy over a period. More commonly, people refer to inflation as "the rising cost of living". A prolonged period of inflation occurs when a nation's money supply growth outpaces economic growth. Generally, people's perspective on Inflation differs based on their economic position. Those with tangible assets, like property or commodities, may prefer some level of inflation as that raises the value of their assets. People holding cash may not like inflation, as it erodes the value of their cash holdings. A country always aims to maintain an optimum level of inflation to promote spending to a certain extent instead of saving, thereby nurturing economic growth. In India, the Reserve Bank of India (RBI) uses consumer inflation as a key measure of inflation to set the monetary and credit policy.

How is retail inflation calculated?

Consumer inflation is based on the Consumer Price Index (CPI). It measures the weighted average of prices of a basket of 260 goods and services which are of primary consumer needs, such as food, transportation, education, fuel, etc. Changes in the CPI are used to assess price changes associated with the cost of living. Prices of sample goods and services are collected every month from 1000-1200 urban markets and villages by field staff of Field Operations Division of NSO, MoSPI, and the change, if any, is noted. The annual percentage change in a CPI is used as a measure of inflation. Consumer price changes in India can be very volatile due to dependence on energy imports, the uncertain impact of monsoon rains on its large farm sector, difficulties transporting food items to market because of its poor roads and infrastructure, and high fiscal deficit.

The CPI basket comprising 260 commodities including certain services is grouped under 11 heads - their weightage in the basket is mentioned in brackets: Food and beverages (45.86%), Transport and communication (8.59%), Health (5.89%), Education (4.46%), Housing (10.07%), Fuel and light (6.84%), Clothing and footwear (6.53%), Pan, tobacco and intoxicants (2.38%), Household goods and services (3.80%), Recreation & amusement (1.68%), Personal care and effects (3.89%).

Example of Retail Inflation

Let's assume 1 kg of apples cost ₹ 10 in the year 2000. Thus, ₹100 could have fetched 10 kgs of apples. In the year 2020, 1 kg of apples cost ₹20 where ₹100 could fetch only 5 kgs of apples. Although the value of ₹100 note remained the same, it lost its purchasing power by 50% over the 20-year period. This phenomenon is called inflation. However, it is not necessary that prices always rise with time as they may remain steady or even decline. Using the same example above, if the price of apples is reduced to ₹5 per kg in 2020, the same ₹100 note could fetch 20 kgs of apples. In this case, the purchasing power of the ₹100 note increased over the period as the price of the commodity declined. This phenomenon is called deflation and is the opposite of inflation.