Retail inflation climbs to 4.91% in November due to rising food prices

Retail inflation in India, measured by the Consumer Price Index (CPI) increased to a three-month high of 4.91% in November 2021, based on the latest data released by the government. The marginal surge in November reflects food price pressures ahead of the arrival of Kharif output while the cut in excise duty on fuel did not provide much relief in controlling the headline inflation.

At 4.91% in November, retail inflation is within RBI’s comfort level of 2-6% for the fifth consecutive month. This gives comfort that the bank could keep interest rates steady at its next meeting in February to support growth (especially given the uncertainty surrounding Omicron). The RBI had kept its key policy rates unchanged in its monetary policy review on December 8. The RBI has projected CPI inflation to peak in the fourth quarter of this fiscal. It has projected the headline CPI inflation at 5.3% for 2021-22, 5.1% in Q3; 5.7% in Q4, and at 5% for Q1 '22-23.

Input cost pressures, a continued pickup in demand, telecom price hikes in December, and GST increase on select items of clothing and footwear in January are likely to keep core inflation under pressure in the next few months just as the base effects turn adverse.

Rating agency Crisil attributed the high base effect for controlling the headline inflation so far. “The high-base effect is playing a key role in keeping headline CPI inflation lower than last year. We expect non-food inflation to remain under pressure in the coming months as commodity prices remain elevated, and producers passing through high input costs to consumers amid improving demand conditions,” it said.

DK Joshi, senior director and chief economist at CRISIL said, "I am somewhat surprised by the 4.91% number. We were expecting a tad above 5%. However, this is in line with what the RBI survey was showing. So I think inflation is on track for 5.3% average for the year."

Higher inflation levels due to price increase were felt particularly in Fuel with a 13.3% increase, the second-highest level recorded since the start of the 2011-12 base year series on which the CPI is computed. Transport & Communication which comprises 8.6% of the overall weight in the consumer price basket recorded a price rise of 10% in November. These categories exert cost pressure on various input items. Inflationary pressure in November was relatively lower in Housing at 3.7% compared to 3.5% in October.

Food Inflation

Food Inflation, determined by the Consumer Food Price Index (CFPI), measures changes in retail prices of food items consumed by the population. CFPI commodities comprise 39.05% of the entire CPI basket.

Food inflation rose to 1.87% in November, inching higher than 0.85% recorded in October. Prices of edible oil increased by nearly 30%, vegetable prices fell by 13.6%, while prices of fruits increased by 6% on a year-on-year basis.

States-wise Inflation

Jammu & Kashmir recorded the highest level of retail price increase at 7.1% in November, closely followed by Delhi at 7.04%. Retail price pressure was the lowest in Odisha at 2.07%, followed by Jharkhand at 2.59%.

Reference Reading

What is retail inflation?

Retail inflation, also called consumer inflation, is a general rise in prices of consumer goods where a unit of currency effectively buys lesser goods and services, resulting in an overall drop in purchasing power in an economy over a period. More commonly, people refer to inflation as "the rising cost of living". A prolonged period of inflation occurs when a nation's money supply growth outpaces economic growth. Generally, people's perspective on Inflation differs based on their economic position. Those with tangible assets, like property or commodities, may prefer some level of inflation as that raises the value of their assets. People holding cash may not like inflation, as it erodes the value of their cash holdings. A country always aims to maintain an optimum level of inflation to promote spending to a certain extent instead of saving, thereby nurturing economic growth. In India, the Reserve Bank of India (RBI) uses consumer inflation as a key measure of inflation to set the monetary and credit policy.

How is retail inflation calculated?

Consumer inflation is based on the Consumer Price Index (CPI). It measures the weighted average of prices of a basket of 260 goods and services which are of primary consumer needs, such as food, transportation, education, fuel, etc. Changes in the CPI are used to assess price changes associated with the cost of living. Prices of sample goods and services are collected every month from 1000-1200 urban markets and villages by field staff of Field Operations Division of NSO, MoSPI, and the change, if any, is noted. The annual percentage change in a CPI is used as a measure of inflation. Consumer price changes in India can be very volatile due to dependence on energy imports, the uncertain impact of monsoon rains on its large farm sector, difficulties transporting food items to market because of its poor roads and infrastructure, and high fiscal deficit.

The CPI basket comprising 260 commodities including certain services is grouped under 11 heads - their weightage in the basket is mentioned in brackets: Food and beverages (45.86%), Transport and communication (8.59%), Health (5.89%), Education (4.46%), Housing (10.07%), Fuel and light (6.84%), Clothing and footwear (6.53%), Pan, tobacco and intoxicants (2.38%), Household goods and services (3.80%), Recreation & amusement (1.68%), Personal care and effects (3.89%).

Example of Retail Inflation

Let's assume 1 kg of apples cost ₹ 10 in the year 2000. Thus, ₹100 could have fetched 10 kgs of apples. In the year 2020, 1 kg of apples cost ₹20 where ₹100 could fetch only 5 kgs of apples. Although the value of ₹100 note remained the same, it lost its purchasing power by 50% over the 20-year period. This phenomenon is called inflation. However, it is not necessary that prices always rise with time as they may remain steady or even decline. Using the same example above, if the price of apples is reduced to ₹5 per kg in 2020, the same ₹100 note could fetch 20 kgs of apples. In this case, the purchasing power of the ₹100 note increased over the period as the price of the commodity declined. This phenomenon is called deflation and is the opposite of inflation.