If inflation is not tamed, there is risk to consumption and growth

Subject: Economy

Section: Inflation and unemployment

Context:

November’s resurgence in headline retail inflation, while clearly not unexpected after the RBI just last week predicted a likely ‘uptick’, is a stark reminder of the risks volatile food prices pose.

More about News

Rise in Consumer price index
- While the National Statistical Office’s provisional reading of headline inflation shows the Consumer Price Index rose by 5.55% year-on-year to a three-month high, from October’s 4.87%, food price gains measured by the Consumer Food Price Index accelerated by a steep 209 basis points to 8.7% last month.

Why inflation is dangerous?

What caused the rise?

Propelling the upsurge in food prices were cereals and vegetables, constituents of the ‘food and beverages’ subgroup, that logged 10.3% and 17.7% inflation, respectively.
Cereals, that account for almost one-tenth of the CPI and logged double-digit inflation for a 15th straight month, also saw a month-on-month acceleration in inflation with rice, wheat, and the coarse cereal of jowar, a rural hinterland staple, all registering palpable sequential price gains.
Vegetable prices were back on a boil with the year-on-year inflation rate surging by almost 15 percentage points from October’s 2.8%.
While price gains in the perishable tomato swung from two straight months of sizeable deflation to a more than 11% year-on-year rate of inflation last month, the extent of increase could be truly gauged from the fact that prices surged a steep 41% from the preceding month’s levels, as per data aggregated on the Centre for Monitoring Indian Economy’s website.
And the key masala essentials of ginger and garlic registered more than 100% rates of inflation for the seventh and third months, respectively.

Major concern

From the TOP or tomato, onion and potato triumvirate of India’s most widely consumed vegetables, onion prices remained the biggest source of concern as year-on-year inflation ballooned to 86%, from October’s 42% pace, and the sequential pace swelled to 48%.
With reports that inclement weather and depleting groundwater are likely to cause a near 25% shortfall in onion output during the key rabi season, the outlook for prices of the nutrient-dense bulb moderating in the near future appears bleak, the government’s move to impose a ban on its exports notwithstanding.

Key Concept For Prelims

Consumer Price Index (CPI)
- A comprehensive tool for estimating price changes in abasket of goods and services that is representative of consumption expenditure in an economy is the Consumer Price Index.
- One of the most significant economic statistics, it provides an estimate of the cost of living and is typically based on the weighted average of commodity prices.
- The amount of inflation during a given period, or the rise in the prices of a representative basket of consumed goods, is indicated by the percentage change in this index over time.
- Four kinds of CPI are as follows: CPI for Industrial Workers (IW),CPI for Agricultural Labourer (AL),CPI for Rural Labourer (RL),CPI (Rural/Urban/Combined).
- The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the NSO in the Ministry of Statistics and Programme Implementation.
- Consumer Food Price Inflation is a specific measure of inflation that focuses exclusively on the price changes of food items in a consumer’s basket of goods and services.
- It calculates the rate at which the prices of food products consumed by the average household are increasing over time.
- CFPI is a sub-component of the broader Consumer Price Index (CPI).