Retail Inflation breaches RBI Comfort Zone

Retail Inflation breaches RBI Comfort Zone

Subject : Economics

Context : Recently, the Wholesale Price Index-based inflation scaled to a record high of 12.94 per cent in May which translated into a higher retail inflation of 6.30 per cent.

Concept :

Retail Inflation

• The change in the consumer price index over a period of time is referred to as CPI-based inflation, or retail inflation.
• The CPI is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
• The CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc.
• The CPI specifically identifies periods of deflation or inflation for consumers in their day-to-day living expenses.
• The CPI is used as a:

Macroeconomic indicator of inflation;

Tool by the central bank and government for inflation targeting and for inspecting price stability; and

Deflator in the national accounts.

Consumer Price Index in India

• In India, there are four consumer price index numbers, which are calculated, and these are as follows:

CPI for Industrial Workers (IW)

CPI for Agricultural Labourers (AL)

CPI for Rural Labourers (RL) and

CPI for Urban Non-Manual Employees (UNME)

• The Ministry of Statistics and Program Implementation collects CPI (UNME) data and compiles it but the remaining three are collected by the Labour Bureau in the Ministry of Labour.

Reasons for Retail Inflation breaching comfort zone of RBI

• The wholesale inflation has been rising for five months, and is expected to rise further as the impact of high crude prices and surging commodity prices feeds in.
• It would cause the retail inflation to rise as well, putting the central bank on a tightrope walk in balancing the growth-inflation dynamics.
• The food inflation component for retail inflation rose significantly higher to 5.01 per cent in May from 1.96 per cent in the preceding month.
• The items that pushed retail inflation were fuel which recorded an inflation of 11.6 per cent, transport and communication at 12.6 per cent, edible oil at 30.8 per and pulses at 9.3 per cent.
• The high rate of inflation in May 2021 is primarily due to low base effect and rise in prices of crude petroleum, mineral oils viz. petrol, diesel, naphtha, furnace oil etc. and manufactured products.
• The continued rise in global crude oil prices, a weaker rupee and the upward revision in domestic fuel prices remain risk factors for the upcoming WPI print.