13 Apr Inflation in India
THIS ARTICLE COVERS ‘DAILY CURRENT AFFAIRS’ AND THE TOPIC DETAILS “THE RECENT FOOD INFLATION IN INDIA AND THE BASICS RELATED TO THE INFLATION”. THIS TOPIC IS RELEVANT IN THE “ECONOMY” SECTION OF GS3 IN THE UPSC CSE EXAM.
Why in the news?
In March, India’s retail inflation eased to its lowest level in 10 months, registering at 4.85%, down from February’s 5.1%. However, food inflation persisted at a high level, staying nearly unchanged at 8.52% compared to the previous month’s 8.66%. This was driven by accelerated price increases in cereals and meat, while double-digit inflation persisted in vegetables, pulses, spices, and eggs.
In March, urban consumers saw a significant decrease in inflation, dropping from 4.8% in February to 4.14%. However, rural consumers faced a slight increase, experiencing a higher inflation rate of 5.45% compared to 5.34% in the previous month.
This divergence was also noticeable in food price trends. Food inflation accelerated from 8.3% in February to 8.6% in March for rural India, while urban areas witnessed a decline from 9.2% to 8.35% during the same period.
Prelims bite
Important reasons for food Inflation
There can be several reasons for Food inflation;
- Supply and Demand Imbalance: If the demand for food exceeds the available supply, prices tend to rise. Factors such as adverse weather conditions, pest infestations, or disruptions in transportation and distribution channels can lead to a shortage of food supply.
- Cost of Production: Increases in the cost of inputs like seeds, fertilizers, labor, and fuel can raise the cost of producing food. These increased production costs are often passed on to consumers in the form of higher prices.
- Government Policies: Government policies such as trade restrictions, export bans, import tariffs, and subsidies can influence food prices. For example, restrictions on exports or hoarding of essential commodities can lead to domestic shortages and price hikes.
- Exchange Rates: Fluctuations in currency exchange rates can affect the prices of imported food items. A weaker domestic currency can make imported food more expensive, leading to higher prices for consumers. For example rate hikes by U.S.A federal bank has a negative impact on Indian markets
- Consumer Behavior: Changes in consumer preferences or dietary habits can affect food prices. For example, increased demand for certain types of food, such as organic or specialty products, can lead to higher prices.
- Global Factors: Events or trends in the global economy, such as changes in oil prices, international trade agreements, or geopolitical tensions, can impact food prices worldwide. For example, Russia- Ukraine war.
- Climate Change: Long-term shifts in weather patterns and extreme weather events due to climate change can disrupt agricultural production, leading to crop failures and decreased food supply, which in turn can drive up prices.
Basics of Inflation
Inflation is the persistent increase in the general price level of goods and services over time, leading to a decrease in the purchasing power of money. Conversely, deflation represents a decline in prices, while disinflation refers to a slowing down of the rate of inflation.
Creeping inflation is a gradual increase in price levels over time, which is generally considered beneficial for the economy. Bottleneck inflation, or structural inflation, arises from a significant decrease in supply coupled with unchanged demand levels.
Skewflation occurs when the rise in prices primarily affects specific commodities or a small group of goods. Galloping inflation denotes very high inflation rates, often reaching double or triple digits, while hyperinflation involves extremely rapid and accelerating inflation, exceeding 50% per month.
Inflation tax refers to the loss of purchasing power experienced by holding cash during times of high inflation. The Phillips Curve illustrates the inverse relationship between inflation and unemployment, suggesting that as unemployment declines, inflation tends to rise.
In terms of origin, inflation is categorized into cost-push and demand-pull. Cost-push inflation results from increases in the prices of production factors such as raw materials, labor, and utilities. Demand-pull inflation occurs when demand rises due to excess money supply without a corresponding increase in supply.
Inflation rates are typically measured using price indices, which gauge the average level of prices across various goods and services. Inflation is assessed on a point-to-point basis, comparing prices in the current month with those from the corresponding month in the previous year.
Consumer Price Index and Wholesale Price Index
The Consumer Price Index (CPI) stands as a crucial indicator for tracking shifts in the prices urban consumers pay for a designated basket of goods and services over time. This index holds significant importance as it offers insights into inflationary patterns within the economy, serving as a key reference point for policymakers, economists, and investors alike to assess changes in the cost of living for citizens.
The computation of the CPI in India falls under the responsibility of the Central Statistics Office (CSO), an integral part of MoSPI. Drawing from a predetermined assortment of essential items, the CPI reflects the evolving prices of goods and services crucial to daily urban life. This selection encompasses a diverse range of necessities, spanning from food essentials and housing costs to transportation expenses, medical services, educational fees, and other vital expenditures.
WPI:
The Wholesale Price Index (WPI) stands as a critical indicator for monitoring changes in the average prices of goods at the wholesale level over time. This index serves as a valuable tool for assessing inflationary patterns within the economy and is extensively utilized by policymakers, economists, and businesses to analyze shifts in production costs and overall price levels.
Administered by the Office of the Economic Adviser under the Ministry of Commerce and Industry, the WPI encompasses a wide array of commodities traded in bulk, spanning raw materials, intermediate goods, and finished products. Unlike the Consumer Price Index (CPI), which focuses on retail prices paid by consumers, the WPI primarily reflects price movements occurring at wholesale level.
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Prelims question
Which index measures changes in the average prices paid by urban consumers for a designated basket of goods and services, providing insights into the cost of living?
A) Consumer Price Index (CPI)
B) Wholesale Price Index (WPI)
C) Producer Price Index (PPI)
D) Gross Domestic Product (GDP)
Correct answer: A) Consumer Price Index (CPI)
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