What is the news ?
- India’s retail inflation decelerated appreciably to 4.59% in December, from 6.93% in November, dipping below 6% for the first time since March 2020 as food prices cooled.
- Other data released by the National Statistical Office (NSO) however, showed that a nascent industrial recovery, which had begun in September, retreated in November as industrial output shrank 1.9%.
What is Inflation?
- Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time.
- The opposite and rare fall in the price index of this basket of items is called ‘deflation’. Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage.
What are the effects of Inflation?
- The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth.
- A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.
Key findings of NSO
- The lowest consumer price inflation (CPI) print in 14 months was driven by an sharp slowdown in food price inflation, which eased to 3.4% in December, from the preceding month’s 9.5% .
- India’s index of industrial production (IIP) for November was dragged lower by mining and manufacturing, which both shrank, as per quick estimates. Mining output contracted 7.3% in the month, while manufacturing declined 1.7%, indicating an unwinding of inventory build-ups with the quenching of pent-up and festive demand.
- Electricity production grew for the third month in a row, rising 3.5% year-on-year. The NSO also revised upwards the index for the preceding three months by incorporating more production data. As per the final data for August 2020, the IIP had shrunk 7.1% in the month, narrower than the 8% estimated earlier.
- In September, industrial output had edged up 0.5% — higher than the 0.2% growth estimated earlier — after shrinking for six months. Industrial output grew 4.19% in October, higher than the 3.6% quick estimate.
- The November data once again shows that the uptick witnessed in the month of September and October was due to a combination of festive and pent-up demand and the recovery is still shallow and fragile.
- Vegetable prices witnessed a 10.4% deflation in December, compared with inflation of 15.5% inflation in November. An accompanying moderation in the inflation rates for meat and fish, eggs and pulses, helped the consumer food price index record its slowest pace of increase in 16 months at 3.4%.
- Core inflation too eased marginally to 5.5% in December, helping overall inflation moderate after having remained above the central bank’s tolerance band for price gains — of plus or minus two percentage points from its medium-term target of 4% — for a prolonged period.
- While the considerable softening in the CPI in December 2020 offers welcome relief, it is unlikely to prove adequate to allow for rates to be eased in the upcoming policy review, as the headline inflation may only record a limited further decline before resuming an uptrend.
- Initial data for this month also suggest a continued plunge in vegetable prices, but point to a broad-based rise in prices of other food items, especially edible oils.
- Additionally, the hardening prices of crude oil, and its partial transmission into domestic retail prices, remain a concern.