Overview of Retail Inflation
- January 13, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Overview of Retail Inflation
Subject: Economy
Section: Inflation
- Data Release:
- The Ministry of Statistics and Programme Implementation released data on Friday indicating retail inflation growth in December at 5.7%.
- Understanding Retail Inflation (CPI):
- Retail inflation, also known as Consumer Price Inflation (CPI), reflects the price rise affecting consumers.
- This data is pivotal in policymaking, particularly for the Reserve Bank of India (RBI) when deciding interest rate adjustments, impacting EMIs on car loans and home loans.
- Inflation Definition and Significance:
- Inflation refers to the general increase in price levels, not specific to a single commodity.
- The inflation rate signifies the percentage by which prices rise; for instance, a 5.7% inflation rate implies a 5.7% increase in the price level compared to December 2022.
- Recent Data Analysis:
- The latest data revealed a retail inflation rate of 5.7%, surpassing the RBI’s target rate of 4%, which is not desirable as per the targets given to MPC.
- Notably, inflation had dipped below 5% in September and October but rose again in November.
- RBI’s Comfort Zone:
- The RBI has a comfort zone for inflation, mandated by law, ranging from 2% to 6%.
- Despite the disappointment, the 5.7% reading falls within this comfort zone, considering supply disruptions due to the pandemic and geopolitical events.
- Inflation Over the Past 10 Years:
- Assuming an annual inflation rate of 4%, the general price level would be 22% higher in five years and 48% higher in ten years.
- Data analysis shows a 24% rise in the price level during the first five years from 2014 – 2019.
- Assuming a 5.5% annual inflation rate for the current financial year, the price level has grown by another 32% over the past five years.
- Real Terms Impact on People:
- To keep up with a 4% annual inflation over five years, a person’s income would need to increase by 22% to maintain their real purchasing power.
Wholesale Price Index (WPI):
- Definition:
- WPI is a widely used inflation indicator in India, published by the Office of Economic Adviser, Ministry of Commerce and Industry.
- Scope:
- It includes all transactions at the first point of bulk sale in the domestic market.
- Criticism:
- Major criticism lies in its focus on wholesale prices, as the general public does not make purchases at wholesale rates.
- Base Year:
- The base year for All-India WPI was revised from 2004-05 to 2011-12 in 2017.
Consumer Price Index (CPI):
- Purpose:
- CPI measures price changes from the perspective of a retail buyer.
- Base Year:
- The base year for CPI is 2012.
- Measurement Scope:
- It tracks changes over time in the retail prices of selected goods and services, reflecting the spending patterns of a defined group of consumers.
- Types of CPI:
- CPI for Industrial Workers (IW).
- CPI for Agricultural Labourer (AL).
- CPI for Rural Labourer (RL).
- CPI (Rural/Urban/Combined).
- Compilation Authorities:
- The first three types are compiled by the Labour Bureau in the Ministry of Labour and Employment.
- The fourth type is compiled by the Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.
Index of Industrial Production (IIP):
- Definition:
- IIP is an index that reflects the growth rates in various industry groups of the economy over a fixed period.
- Base Year:
- The base year for IIP is 2011-2012.
- Compilation Authority:
- Compiled and published monthly by the Central Statistical Organization (CSO), Ministry of Statistics and Programme Implementation.
- Composite Indicator:
- IIP is a composite indicator measuring the growth rate of industry groups categorized under broad sectors (Mining, Manufacturing, and Electricity) and use-based sectors (Basic Goods, Capital Goods, and Intermediate Goods).
- Core Industries:
- The eight core industries in India, representing about 40% of the IIP weight, significantly contribute to this index.