Why is there divergence in inflation across States?

Why is there divergence in inflation across States?

Subject :Economy

Section :Inflation

Context:

India’s economy grew at a slower-than-expected 13.5% in the first quarter of the year. Private consumption picked up, but inflation has been a dampener.

• But an analysis of State-wise inflation prints for this period reveals that 14 States as well as three UTs, including Jammu and Kashmir, have faced higher than the national inflation, most of them averaging over 7% in the same period while some states (West Bengal, Telangana) faced above 8% inflation.

What explains the variations in price rise among the States?

• States that are not major crop producers have higher food inflation as transport costs are added on, and those with predominantly rural areas also clock more inflation as the CPI for rural areas assigns a higher weightage to food
• Consumption patterns and divergences in different items’ price trends also influence variations among States.
• Some States lowered their fuel taxes also made a difference.

Why does it matter?

• While the share of private consumption has spiked to nearly 60% of GDP in Q1 2022-23, this persistently high inflation has dented spending propensity, particularly in rural India that is facing more price pressures.
• With the monsoon’s progress still uneven, there is anxiety about rural demand even as inflationary pressures will continue to cramp household budgets.
• Identifying what is driving inflation higher (or lower) in some States vis-à-vis others could help policy makers address those pressure points more specifically to provide lasting relief to consumers, apart from other broad-brush ploys such as interest rate hikes and trade curbs to cool prices of individual items.