13th June 2025 (9 Topics)

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Retail Inflation Dips Below Target

Context

India’s annual retail inflation eased to 2.82% in May 2025, marking the longest streak below the RBI’s medium-term target of 4% in six years. This decline is primarily attributed to falling food prices, especially vegetables, and has further justified the RBI’s recent 50 basis point rate cut to support economic growth.

Retail Inflation (CPI) Trends

Retail inflation (measured by Consumer Price Index) stood at 2.82% in May 2025, down from 3.16% in April 2025.
This is the lowest CPI inflation in over six years and falls below the RBI’s target range (4% with a ±2% tolerance band).

Drivers of Low Inflation

Food inflation, which contributes nearly 50% to the CPI basket, dropped to 0.99%, the lowest since October 2021.
Vegetable prices fell 13.7%, while pulses declined by 8.22% year-on-year.
Cereal inflation also eased to 4.77%, from 5.35% in April 2025.

Monetary Policy Implication

RBI reduced the repo rate by 50 bps in June 2025 due to sustained low inflation, signaling a shift in policy to stimulate growth.
The monetary policy stance was changed from "accommodative" to "neutral", indicating limited scope for further easing.

Key terms and Facts:

Inflation:

Inflation is the sustained increase in the general price level of goods and services over time.
It leads to a reduction in the purchasing power of money.
Measured commonly using:
- Consumer Price Index (CPI) – reflects retail prices.
- Wholesale Price Index (WPI) – reflects bulk prices.

Inflation vs Deflation

Inflation: Prices rise ? Purchasing power falls.
Deflation: Prices fall ? Purchasing power rises.
Deflation usually indicates weak demand and economic contraction.

Types of Inflation – Based on Rate

1. Creeping Inflation:

Price rise: Less than 3% annually.
Considered manageable and non-disruptive.
Often stimulates demand and investment.

2. Walking Inflation (Trotting):

Price rise: Between 3% to 10% per year.
Warning sign for policymakers; may lead to overheating.

3. Galloping Inflation (Hopping or Running):

Price rise: Between 10% to 50% annually.
Disrupts economic balance; erodes real incomes.

4. Hyperinflation:

Price rise: More than 50% per month.
Results in currency collapse.
Historical examples: Zimbabwe (2000s), Weimar Germany (1920s).

Types of Inflation – Based on Causes

1. Demand-Pull Inflation:

Occurs when aggregate demand exceeds supply.
Seen during high growth periods.

2. Cost-Push Inflation:

Triggered by rising input costs (e.g., wages, raw materials).
Common during supply chain shocks.

3. Structural Inflation:

Caused by bottlenecks in the economy (e.g., poor infrastructure, rigid markets).
Persistent and difficult to control.

4. Protein Inflation:

Linked to rising prices of protein-rich foods (e.g., pulses, eggs, milk).
Driven by dietary shifts and supply constraints in developing economies.

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