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 of time. 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 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 current base year of CPI is 2012 with base value 100. So if the CPI for Food & Beverages in Mar'20 is say 149, it implies that the same basket of goods that costed ₹ 100 in 2012 now costs ₹ 149.
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 Consumer 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% percent over the 20-year period. This phenomenon is called inflation. However, it is not necessary that prices always rise with the passage of 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.
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 of time. 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 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 current base year of CPI is 2012 with base value 100. So if the CPI for Food & Beverages in Mar'20 is say 149, it implies that the same basket of goods that costed ₹ 100 in 2012 now costs ₹ 149.
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 Consumer 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% percent over the 20-year period. This phenomenon is called inflation. However, it is not necessary that prices always rise with the passage of 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.
SUBJECT Variables
GENERAL INFLATION
This is a broad indicator of the entire basket of Consumer Goods.
- Retail inflation increased to 3.65% in Aug'24 from 3.60% in Jul'24
- Higher y-o-y inflation levels in Aug'24 were felt particularly in Food & Beverages at 5.30%. Transport & Communication, which comprises 7.6% of the overall weight in the consumer price basket, saw a price increase of 2.71% in Aug'24. These categories can potentially exert cost pressure on various other input items. Inflationary pressure in Housing decreased from 2.68% in Jul'24 to 2.66% in Aug'24.
- On an annualized basis, inflation in 2023-24 was recorded at 5.36%.
FOOD INFLATION
It is based on the Consumer Food Price Index (CFPI) which measures changes in retail prices of food items consumed by the population. The weight of the CFPI commodities is 39.05% of the entire CPI basket.
- Food inflation increased to 5.66% in Aug'24, from 5.42% in Jul'24. Prices of vegetables increased by 10.71% and the cost of pulses increased by 13.60%.
- The annual food inflation increased to 7.48% in 2023-24 from 6.63% in 2022-23.
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