Context: According to the Consumer Price Index data retail inflation dropped to 5.91% in March from the 6.58% in February, mostly on a drop in food prices.
Key highlights of data released by NSO(National statistical Office):
- Food inflation fell to 8.76% in March, in comparison with the 10.81% in February.
- Vegetable price inflation saw the sharpest fall, dropping from 32% to 19% over the course of a month.
- Spices and prepared food, snacks and sweets were the only food categories that saw a slight increase in prices.
- The trend of falling will continue over the next few months: Retail inflation has been easing off since hitting an almost six-year high of 7.59% in January.
- With low crude oil prices and sharp slowdown in the economy, CPI inflation is expected to fall further.
- Weak demand side pressure on inflation would outweigh any supply side bottlenecks in the near-term.
- Supply shortages due to the 21-day lockdown could push up inflation in the short run.
- Urban inflation could rise during the lockdown, followed by a correction in CPI inflation.
Implications of low inflation:
- Low inflation means a high real interest rate that tends to crimp investment activity.
- As per Phillips curve inflation and growth move together and in the same direction.
- Lower tax collections: Tax collections depend on nominal GDP growth — lower the latter, higher the chance of missing tax collection targets forcing the Government to slash expenditures to meet fiscal targets.
What lies ahead:
- The real impact of the lockdown will be felt in April as prices of food items have increased quite sharply.
- Lockdown and limited movements can push food inflation towards the 10% mark.
- Core inflation will trend downwards as service prices would not change and those products with maximum retail price would not witness a change in prices even with supplies declining.
- Food prices may soften under the beneficial effects of the record foodgrain and horticulture production.
RBI is expected to focus on reviving the economy and may further cut policy rates to boost lending through financial institutions.
Consumer Price index
- The Consumer Price Index (CPI) 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.
- Changes in the CPI are used to assess price changes associated with the cost of living.
- 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.
- Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
- Inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.
- Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
Demand-pull inflation: Demand-pull inflation occurs when the overall demand for goods and services in an economy increases more rapidly than the economy's production capacity.
Cost-push inflation: It is a result of the increase in the prices of production process inputs.
Built-in inflation: It is the third cause that links to adaptive expectations. As the price of goods and services rises, labor expects and demands more costs/wages to maintain their cost of living. Their increased wages result in higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.
Core inflation: An inflation measure which excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products etc. It reflects the inflation trend in an economy.