Decline in Retail Inflation Rate

14-05-2024

Decline in Retail Inflation Rate

 

GS-3: Indian Economy

(UPSC/State PSC)

14/05/2024

Source: IE

Why in news:

According to the latest data released recently by the Ministry of Statistics & Program Implementation (MoSPI), India's retail inflation declined marginally on an annual basis to an 11-month low of 4.83 percent in the month of April, as non-food items helped moderate price rises, while food items recorded higher inflation rates. Whereas it was recorded at 4.85 percent in the last month.

Rural Food Inflation:

  • Rural food inflation rose to 8.75 per cent in April from 8.55 per cent in March and 3.89 per cent in the year-ago period.

Urban Food Inflation:

  • Urban food inflation increased from 8.41 percent in March to 8.56 percent in April and to 3.69 percent in April 2023.
  • Food inflation has increased due to RBI's monetary policy and increasing risks of heatwave.

Significance of decline in retail inflation rate:

  • Decrease in retail inflation is a positive aspect for the economy. It provides some relief to consumers who are affected by rising prices of essential goods and services. Apart from this, it will provide more flexibility to RBI in determining monetary policy.
  • However, it remains to be seen whether this trend will continue and whether the RBI will adjust interest rates accordingly.

About Retail Inflation Rate:

  • When there is a decline in the value of currency due to increase in the price of goods or services in a certain period, it is called inflation.
  • When inflation is expressed in percentage, it is called inflation rate or retail inflation rate.
  • In simple words, it shows the speed of price fluctuations.

Measuring Retail Inflation:

  • Retail inflation rate in India is measured on the basis of ‘Consumer Price Index’ (CPI). It measures price changes from the buyer's perspective.
  • It measures changes over time in the level of retail prices of selected goods and services on which consumers spend their income.
  • Retail inflation rate often refers to the rate of inflation based on the Consumer Price Index (CPI).
  • CPI tracks changes in the retail prices of goods and services that households purchase for their daily consumption.
  • To measure inflation, it is estimated by how much the CPI has increased in terms of percentage change compared to the same period in the previous year. If prices have fallen, this is known as deflation (negative inflation). The Central Bank (RBI) pays great attention to this data in its role of maintaining price stability in the economy.
  • CPI monitors retail prices for a particular commodity at a certain level; Price fluctuations of goods and services at rural, urban and all India level. Changes in the price index over a period of time are called CPI-based inflation or retail inflation.
  • To calculate CPI, the quotient of the cost price of the current period and the base period is multiplied by 100.
  • CPI Formula: (Basket price in current period / Basket price in base period) x 100
  • Four types of CPI have been determined:
  • CPI (IW) for Industrial Workers
  • CPI (AL) for agricultural laborers
  • CPI (RL) for rural laborers
  • CPI for Urban Non-Manual Employees (UNME)
  • The first three of these are compiled by the Labor Bureau of the Ministry of Labor and Employment. The fourth is compiled by NSO in the Ministry of Statistics and Program Implementation.
  • Presently the base year of CPI is 2012.
  • The Reserve Bank of India has been fixed by the government to keep the inflation rate at 4% (up or down 2%).

Causes of decline in retail inflation rate:

  • Retail inflation rate has declined due to decline in non-food prices.

Other possible causes:

  • Adoption of tight monetary policy by RBI.
  • Adoption of contractionary fiscal policy by the government.
  • Increase in people's tendency to save.
  • Higher interest on bank deposits – Sukanya Samriddhi Yojana.

Benefits of decline in retail inflation rate:

  • Purchasing power of the poor will increase.
  • Loan will be easily available from the bank.
  • Will help in maintaining normal level of liquidity in the market.
  • Domestic savings will increase – Increase in domestic savings will increase investment due to increase in bank deposits.

Demerits:

  • The profit of the business class will be less and production may be affected due to this.
  • Employment generation may reduce (according to Phillip curve).

Possible measures to control retail inflation rate:

  • Reducing the flow of money in the economy, increasing the growth rate of production, importing products and reducing the cost of products by improving production technology are some of the efforts through which retail inflation rate can be controlled.

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Mains Question:

What is the retail inflation rate? Discuss its impact on the Indian economy.