DIVERGENCE IN RURAL-URBAN INFLATION

DIVERGENCE IN RURAL-URBAN INFLATION

Subject: Economics

Context: Rural-urban inflation divergence does not persist in the long run and converges over time, and both exhibit a long-term equilibrium relationship, said an RBI article.

Concept:

• Rural-urban inflation divergence does not persist in the long run and converges over time, and both exhibit a long-term equilibrium relationship, said an RBI article.
• This convergence of rural-urban inflation supports the relevance of one inflation target as nominal anchor at the national level.
• It can be observed from monthly data that rural and urban all groups inflation have often diverged during 2012-2020, but the divergence has not persisted long, suggesting the existence of a long-run relationship between them.
• The article noted that headline Consumer Price Index (CPI) inflation witnessed significant and sustained moderation during 2012-13 to 2018-19, before rising thereafter. Both rural and urban inflation exhibited a similar trend with the only difference that urban inflation started rising from 2018-19.
• It further said that in 2020-21 so far, headline inflation has firmed up further reflecting the impact of COVID-19 induced lockdown measures and associated supply chain disruptions. Rural and urban inflation, however, have displayed significant convergence, broadly mirroring the trends in food price inflation after April-May 2020.
• The RBI said the views expressed in the article are those of the authors and do not represent the views of the central bank.

Reasons for divergence:

• Different baskets of product consumed
• Structural problems like infrastructure
• Costlier food price
• Fuel usage