Why states experiences divergence in inflation rates?

• Recently, the Consumer Price Index (CPI) released the ‘State-wise Inflation measurement index’.

State-wise Inflation Ratio:

• Inflation measured by the Consumer Price Index (CPI) crossed the central bank’s upper tolerance limit of 6% in January and has averaged 6.8% till July 2022.
• But an analysis of State-wise inflation prints for the period 2022 evaluated 14 States as well as three UTs.
• India’s economy grew at a slower-than-expected 13.5% in the first quarter of the year.
• Private consumption picked up, but inflation has been a dampener.
  
  

Why does it happen?

• Food price inflation which dropped to a five-month low of 6.8% in July, is a key differentiating factor for States’ inflation experience, explained Bank of Baroda chief economist.
• States that are not major crop producers have higher food inflation as transport costs are added on, and those with predominantly rural areas also clock more inflation as the CPI for rural areas assigns a higher weightage to food.
• Rural inflation has averaged more than urban inflation at 7.07% from January to July, and 7.6% in the four months since it peaked at 8.38% in April.
• Urban inflation crossed 6% in March 2022, has averaged 6.47% through 2022 and fallen 0.6 percentage points by July from its 2022 high of 7.09% in April.

Divergence in inflation:

• Consumption patterns and divergences in different item price trends also influence variations among States.
• While the share of private consumption has spiked to nearly 60% of GDP in Q1 2022-23.
• This persistently high inflation has dented spending propensity, particularly in rural India which is facing more price pressures.
• According to CRISIL’s chief economist, Private consumption is improving, with urban demand getting support from contact-intensive services. If it had not been for high inflation and subdued rural demand due to negative real rural wage growth, private consumption would have grown faster.