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A surge foretold: Inflation could undermine broader consumption and economic growth

  • Published
    16th Aug, 2023

Context:

NSO data, showed retail inflation accelerating to a 15-month high, comes less than a week after the Reserve Bank of India (RBI) left interest rates unchanged even as it warned of “a substantial increase in headline inflation” in the near term. 

Inflation dynamics-things to know

  • Retail inflation: Also called as Consumer Price Index (CPI) inflation, it is the increase in the prices of goods and services that consumers buy for personal use. Any increase may hamper consumption.
  • CPI as economic tool: CPI is used as a macroeconomic indicator of inflation, as a tool by the central bank and government for inflation targeting and for inspecting price stability, and as deflator in the national accounts.
  • Headline inflation and core inflation: Change in the prices of all goods in the basket is headline and when we exclude food and fuels items from this basket (as they are volatile) we get core inflation.

What does recent Data reflects?

  • Recent surge: Driven by food price component, accelerating by 11.51%, from June’s 4.55%. Besides oils and fats, the 12 basket CPI index showed year on year increase.
  • Surge in staples: Cereals, with almost 10% weight in the CPI representing rice and wheat, saw prices surge 13% from July 2022 levels. Data compiled by CMIE show the sequential surge in vegetable prices was the highest in at least five years.
  • Effect on common man: Prices of 18 of the 19 items in the vegetables sub-group registered appreciable sequential price gains making it for family to manage its monthly food budget. Inflation in non-food items too were a palpable (easy felt) concern. 

Concerns and Way forward:

  • Spread of inflation: The 5 other broad groups on the CPI, all recorded price increases, signalling inflation is now more widely spread across the goods and services consumed in the economy. Lifting the food bill by over 12.3% for urban, while rural consumers encountered 11% food inflation.
  • Impacts: Undermines broader consumption and economic growth. Optimism that current price shock is temporary, policymakers are cautious about disregarding the impact of a couple of high headline inflation readings. Concern lies in risk of inflation expectations becoming unanchored due to rapid & sustained price increases.
  • Way forward: looming El Niño and uneven monsoon adds uncertainty over the supply the RBI may find an uphill task in aligning inflation to its avowed target of 4% unless all authorities act in concert. Changes in interest rates can signal the central bank's stance on controlling inflation. If the central bank raises rates to curb inflation, it sends a message that it is committed to controlling rising prices.
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