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According to the latest official release, India’s consumer price index (CPI) based inflation rate touched 5.7% in December. While this is a routine — monthly — release, its timing is significant for a variety of reasons.
For one, from the point of fiscal policy, this is the last inflation data release before the presentation of the Union Budget on February 1. Two, from the point of monetary policy, it will be the most recent data available with the Monetary Policy Committee of the Reserve Bank of India before its reconvenes in later February. Lastly, this is the first release in the election year and, as such, it can be more politically significant than normal.
What is CPI inflation?
The CPI inflation is nothing but the rate of inflation that consumers face. It is different from the major inflation indicator — the wholesale price index-based inflation rate.
According to the Ministry of Statistics and Programme Implementation (MoSPI), which releases the data, the consumer price index measures “changes over time in general level of prices of a basket of selected goods and services that households acquire for the purpose of consumption”.
At an all-India level, the current CPI basket comprises 299 items.
Apart from an aggregate index, consumer price indices are constructed for both rural and urban consumers as well.
How is it calculated?
The “base year” for the current series of indices is 2012. In other words, the price index is given a value of 100 for 2012 and changes from these price levels are then calculated to arrive at inflation rates for each good or service.
According to the National Statistical Office within the MoSPI, the monthly price data is collected from 1181 villages and 1114 urban markets spread all across the country. The data for this purpose is collected on a weekly basis by the field staff of NSO.
What are its components?
The CPI has six main components, each with differing weights and many more sub-components within them. The main components as follows :
1> Food and beverages
2> Pan, tobacco and intoxicants
3> Clothing and footwear
4> Housing
5> Fuel and light
6> Miscellaneous (services such as education, health care etc.)
Among these, food articles currently weigh 45% of the total index. The second-biggest component is that of miscellaneous services. Within the food category, cereal prices are the biggest factor — they account for 9.67% of the total CPI.
This means that a spike in prices of food articles like cereals, vegetables, milk and pulses tends to have the biggest impact in raising consumer inflation. And the reason why food articles have been given such a high weightage is that most Indian consumers tend to spend a considerable portion of their income towards meeting their food demand.
What does the data show?
The inflation rate for any period can be analysed in two ways. One is to look at this December’s price level and compare it with the price level in December last year. The inflation rate — or the rate at which prices have gone up — so calculated is called the year-on-year increase. This is the most often used inflation rate.
However, one can also calculate the month-on-month change by comparing the prices in December to the prices in November.
The data shows that the YoY inflation rate has started rising towards the end of 2023. The MoM data, however, shows deflation in December.
Deflation means that prices fell from one period to another. It is noteworthy that deflation is different from disinflation (which means a deceleration in the rate of inflation from one month to another).
Among the different components, it was the relative spike in food prices that caused the YoY inflation to rise in December. In particular, vegetable prices increased by almost 28% (relative to December 2022), while pulses were costlier by 21% and spices by 20%. Cereals, too, were costlier by 10%. Such high levels of inflation in just these four food groups, which account for 23% of the total index weight, pushed up the overall inflation rate.
Lastly, as always, the inflation rate varied across the country with Odisha registering the highest inflation at 8.7% and Delhi experiencing the lowest at 2.9%.
What is the significance?
Looking ahead, most analysts, like Dipti Deshpande of CRISIL expect the inflation rate to ease in the coming months as the Kharif harvest as well as government interventions bring down food inflation. On the whole, inflation for the full financial year is likely to be 5.5% with the March 2024 inflation rate expected to be at 5%.
Further, regardless of what is happening to headline inflation, the core inflation rate — that is inflation rate after removing the food and fuel inflation — has been trending down.
However, from the perspective of monetary policy, the latest inflation data is likely to delay the cut in interest rates (read EMIs). Before the inflation reversed its trend and started rising in November and December, there were many who had hoped that the RBI may cut as early as April this year. However, it now looks unlikely that RBI will cut interest rates before August.
“Important to note is the RBI view that food shocks can have second order effects that impede attaining policy goals. Hence, we believe that the RBI is unlikely to pivot soon – both on the rates as also on the stance of monetary policy…Effectively, we think the expected growth-inflation dynamics can lead to a shallow rate cut only starting in August 2024,” said Indranil Pan, Chief Economist of Yes Bank.
Higher inflation is also not good news for fiscal policymakers. Partly this has to do with the political ramifications that rising inflation rate can have so close to the elections. But from the perspective of Budget making, too, uncertainty around inflation is hardly welcome.
