Context: The June Retail inflation at 6.1% has raised some alarming bells in the economic circles of the country as it is above RBI’s permissible limits of 2-6 %.

More on news:

  • The data is worrisome as June is the first month in which the unlock process was initiated in a phased manner.
  • Further the cause of worry is the depressed demand among the consumers which may take the nation towards stagflation in near future which involves experiencing a simultaneous increase in inflation and stagnation of economic output.
  • As per Consumer Price Index data prices of food and beverages rose 7.3% on a year on year basis, which is a huge rise despite distress sales by farmers of fruits and vegetables.
  • Transport and Communication also posed a 7.1% rise owing to persistent rise in domestic oil price.
  • While employers are set to cut jobs to cope with decreasing demand, companies also plan to raise selling prices over the next year to protect profitability. 

Way Ahead:

  • The recent sustained increase in fuel prices is expected to feed through into higher costs for transporting farm produce and it is therefore hard to envisage food prices softening, at least in the near term.
  • Timely and evenly spread monsoon can give some respite to farmers and to inflation levels.
  • Still, for now, vegetable prices are reported to be surging and providers of goods and services are exploring ways to insulate their businesses financially from the weak demand. 
    • For instance - Steel companies recently announced they were raising prices in response to rising costs related to iron ore and the COVID-19 pandemic. 
  • With inflation already above the RBI’s 6% target upper bound, monetary policy makers face a very difficult choice where a further rate cut to help revive economic momentum may put the economy on the path of stagflation.

Consumer Price Index:

  • It is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. 
  • It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
  • The Base Year is 2011-12.
  • The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
  • In April 2014, the RBI had adopted the CPI as its key measure of inflation.
  • The dataset is published by the Central Statistical Office and released on 12th of every month.