Rising Inflation in India | 21 Nov 2024

Source: PIB

Why in News?

The Ministry of Statistics & Programme Implementation (MoSPI) recently reported that the Consumer Price Index (CPI) or the retail inflation surged to 6.2% in October 2024 and the Food inflation, as per the  Consumer Food Price Index (CFPI), rose to 10.87%. 

• This marks the highest inflation rate since August 2023, surpassing the Reserve Bank of India's (RBI) upper tolerance limit of 6%. 
• Despite global inflation easing, India faces persistent price pressures, leading experts to reassess forecasts and interest rate impacts. 

What Factors have Contributed to High Retail Inflation in India? 

• High Food Inflation: A significant contributor to the surge was food inflation, which hit a 15-month high at 10.8%. 
  • Vegetable prices shot up by 42%, marking a 57-month high. Fruit prices rose by 8.4%, and pulses saw a 7.4% increase.  
• Core Inflation Uptrend: Core inflation, which excludes food and fuel prices, has also edged upwards, signaling persistent inflationary pressure beyond just food. 
  • Inflation in household services is climbing, reflecting higher living costs. 
• Global Price Volatility: A sharp rise in global edible oil prices, driven by supply disruptions and other international market factors, has directly impacted India's inflation.  
  • Since India is a major importer of edible oils, any increase in global prices results in higher costs for domestic consumers, contributing to food inflation. 
• Extreme Weather Events: Heatwaves have negatively impacted crop yields, leading to supply shortages and higher prices 

What are the Implications of High Retail Inflation on RBI’s Monetary Policy? 

• Delay in Interest Rate Cuts:  The RBI inflation target is 4%, with a tolerance band of 2% to 6%. With inflation exceeding this threshold, immediate interest rate cuts are unlikely. 
  • Experts predict that the RBI might only consider reducing rates in 2025 if inflation shows a sustained decline. 
• Focus on Inflation Control: The RBI will continue to prioritize controlling inflation to maintain price stability, as unchecked inflation undermines economic growth and purchasing power. 
  • The RBI had projected inflation to moderate to 4.8% in Q3 and 4.2% in Q4 of FY 2024-25, but this now seems less likely, affecting the future trajectory of interest rates. 
• RBI’s Policy Dilemma: The RBI faces a difficult decision, while it must curb inflation, it must also avoid stifling economic growth. Rising food prices and supply disruptions are major contributors to inflation, complicating policy decisions. 
  • Given the persistent inflationary pressures, the RBI may adopt a cautious approach, waiting for inflation to decline before adjusting interest rates. Alternatively, it could implement a tight monetary policy, which, while controlling inflation, may also impact economic growth. 
• Potential Risks of Unchecked Inflation: The RBI stated that continued inflation could undermine the real economy, particularly industry and exports. 
  • If rising input costs are passed on to consumers, it could reduce consumer demand and negatively impact corporate earnings. 
  • This may especially affect sectors like manufacturing, which rely on stable input costs and margins.

What is the Consumer Price Index? 

• About: The CPI measures the change in retail prices of goods and services commonly purchased by households for daily consumption.  
  • It is used to track inflation, with the base year for the CPI being 2012. 
• Purpose: CPI is a widely used macroeconomic indicator of inflation, used by governments and central banks for inflation targeting and price stability monitoring, and as deflators in national accounts.  
  • CPI is also used to index dearness allowance to employees for increases in prices. 
  • CPI helps understand the cost of living, purchasing power, and the expensiveness of goods and services. 

What is the Consumer Food Price Index? 

• CFPI measures inflation that focuses exclusively on the price changes of food items in a consumer's basket. 
• CFPI tracks price changes of a basket of commonly consumed food items like cereals, vegetables, fruits, dairy, meat, and other staples. 
  • Like the CPI, the CFPI is calculated monthly with the base year presently used as 2012. 
• The Central Statistical Office (CSO), MOSPI releases CFPI for three categories (rural, urban, and combined) separately on an all-India basis.