Inflation Cooled To 5% In September

Relevance: GS3 - Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

(Source: The Hindu, 10/13/2023)

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Why in the news?

• Recently, India’s retail inflation eased from 6.83% in August to 5.02% in September on account of base effects, the LPG rate cut, and the easing of vegetable prices.
• The RBI had earlier highlighted the risk posed by high inflation to the macroeconomic stability of the country while presenting the Monetary Policy Committee (MPC) Report in October.

Inflation trends

• Retail inflation: It dropped from 6.83% (August 2023) to 5.02% (September 2023), after two months of being above the RBI’s threshold tolerance (6%).
  • Retail inflation or Consumer Price Index (CPI) inflation, is the rate of increase in the prices of goods and services that consumers buy for personal use.
• Food prices: The rise in food prices dropped to 6.6% from 10% in the same period.
  • Food prices fell 2.2% in September, while overall consumer price levels dropped 1.1% on a month-on-month basis.
  • Inflation in vegetables fell to 3.4% in September from 26.1% in August but inflation in cereals remained at 11% and inflation in pulses rose from 13% in August to 16.4% in September.
  • While Milk inflation dropped from 7.7% in August to 6.9%, inflation in key protein sources like eggs (6.4%), meat, and fish (4.11%) rose.
  • Inflation in fruits rose from 4% to 7.3% in September.
  • Inflation in sugar rose to 4.5% in the same period.
• Rural and urban inflation: Inflation faced by rural consumers dropped from 7% to 5.33% while inflation for urban consumers dropped from 6.6% to 4.65% between August and September.

Inflation projections

• In October, the MPC raised its average inflation projection for the July-to-September quarter from 6.2% to 6.4%.
  • The National Statistical Office (NSO) has projected an average inflation of 6.43%.
• It also projected inflation in the October-to-December quarter to average around 5.6% and for 2023-24 to be around 5.4%.

State-wise

• 13 of the 22 States for which the NSO releases inflation rates recorded a higher price rise than the headline figure of 5.02%.
  • Rajasthan and Haryana were the highest at 6.5% while Chattisgarh was the lowest at 1.98%.
  • Inflation was below 5% in eight states including Kerala (4.7%), Tamil Nadu (4.5%), Madhya Pradesh (3.7%) and West Bengal (3.7%).

What are the factors that have aided the drop in inflation?

• LPG price cut: In September, the Union Government announced cuts on the prices of domestic LPG cylinders.
  • This resulted in the year-on-year inflation in fuel and light prices for households dropping from 4.3% in August to -0.1% in September.
• Base effect: Advantageous base effects also helped in bringing the inflation rate under control to a level that was lower than economists’ expectations, but almost in line with the MPC projections.
  • In September 2022, consumer prices rose 7.4%.
• Easing of vegetable prices: The significant drop in vegetable prices between August and September also helped control the retail inflation in the economy.

Factors that are likely to affect inflation in the coming months

• Kharif harvest: In case of any shortfall in production of any crop, prices can increase at a faster rate adding to inflation.
• El Nino effect: El Nino events are generally considered to be inflationary in nature.
  • The El Nino is projected to persist and strengthen through the 2023-24 winter, which could have an adverse impact on crops and water availability as it suppresses the availability of rain in India.
  • This could lead to a rise in the prices of food.
• Israel-Palestine crisis: Instability in the Middle East region, like the Israel-Gaza conflict, can lead to speculative price hikes for oil due to potential supply disruptions.
  • The rise in oil prices will affect global inflation rates and trade balances.
• Cost of services: The cost of services have risen in September - health(5.9%) and personal care (8.5%).
  • Airline and hospitality costs are also expected to rise in the coming months.

To learn more about the impact of inflation on the economy, click the link.

FAQs

MCQs

Question: A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is the “base effect”? (UPSC CSE 2011)

(a) It is the impact of drastic deficiency in supply due to failure of crops

(b) It is the impact of the surge in demand due to rapid economic growth

(c) It is the impact of the price levels of the previous year on the calculation of the inflation rate

(d) None of the statements (a), (b), and (c) given above is correct in this context

Question: Consider the following statements [2020-I]

1. The weightage of food in the Consumer Price Index (CPI) is higher than that in the Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which the CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.

Which of the statements given- above is/are correct?

(a) 1 and 2 only

(b) 2 only

(c) 3 only

(d) 1, 2 and 3