CONSUMER PRICE INDEX AND UNTAMED INFLATION

ChinmayaIAS Academy - Current Affairs February 15, 2023 GS3, Indian Economy Leave a comment 1,242 Views

Just five days after Reserve Bank of India Governor Shaktikanta Das asserted that inflation ‘has shown signs of moderation and the worst is behind us’, Monday’s release of Consumer Price Index (CPI) estimates for January revealed a disconcerting reversal in price gains trend.
Headline retail inflation, which had steadily eased over the last quarter of 2022 from September’s five-month high of 7.4%, quickened by 80 basis points last month to 6.5%.
Propelling the acceleration was a 175 basis-points jump in food prices, with inflation measured by the Consumer Food Price Index, quickening to 5.94%, from December’s 4.19%.
Adding to the disquiet is the fact that inflation had already been at an elevated 6% in January 2022, implying that the year-on-year increase was sans a favourable base effect and entirely due to an upsurge in the momentum of price gains. Food prices climbed across the board, with vegetables being the solitary item in the CPI’s 12-member food and beverages sub-group to post a year-on-year deflation of 11.7% as winter supply outstripped demand.
Cereals, which include rice and wheat and carries the heaviest weight of almost 10% in the sub-group, logged a 16.1% jump in prices, and milk and dairy products, the second-heaviest, saw prices gain by 8.79%.
Policymakers must be particularly worried about the 2.6% month-on-month dilation in cereal prices, more so because this disproportionately impacts rural households, which spend a larger share of their income on food.
With a 12.4% weight in the rural consumption basket, cereal prices fuelled January’s overall rural headline inflation at an even quicker 6.85% pace.
The surprise reversal in price trends suggests inflationary expectations in the economy are nowhere near anchored and will necessitate further policy action both from the RBI and fiscal authorities.
To be sure, Mr. Das last week not only announced a 25 basis-points interest rate increase but also committed the RBI to enacting policy that ensures a durable disinflation.
With core inflation, or price gains that strip out the impact of food and fuel prices, remaining stubbornly stuck above 6% and in fact inching up last month to 6.23%, from December’s 6.22%, policymakers face the challenge of targeting the components of the inflationary trend that can be addressed by raising credit costs and tamping down on demand.
Given that inflation in several key services categories including health and personal care is running well above the RBI’s upper bound of 6%, with prices continuing to harden, the Centre and States must mull measures including rationalisation of GST rates to help ease the inflationary burden on the economy. With overseas demand set to stay weak this year, untamed inflation risks hurting domestic consumption and thereby overall economic growth.