India’s retail inflation

Context- Retail inflation showed signs of easing in November, led by easing prices of some food items.

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Consumer Price Index inflation stood at 6.93% in November 2020 compared to 7.61% in October, according to data released by the Ministry of Statistics and Program Implementation, though it remained above the comfort level of the Reserve Bank.

What are the reasons for decline in CPI inflation?

1. The movement in retail inflation is broadly driven by the movement in food and beverage inflation which has 46 per cent weight in the consumer price index.

• Within the food items, the inflation declined for vegetables to 15.63%, cereals and products 2.32%, meat and fish 16.67% and milk and products 4.98%.

2. Inflation in the key transport and communication category that includes petrol and diesel eased by a marginal 10 basis points to 11.06%.
3. The inflation for housing eased to 3.19%, while that for miscellaneous items was flat at 6.94% in November 2020.

• Within the miscellaneous items, personal care and effects 11.97%, recreation and amusement 4.57%.

What are the areas of concern for RBI?

1. Inflation remained above the comfort level of the RBI-

• Out of the food basket of 12 items, inflation still remained in the double digits in the case of six.
• Key protein sources including pulses, eggs and meat and fish continued to register worryingly high levels of inflation.

2. Worrying high transportation cost– With oil marketing companies continuing to raise pump prices of these crucial transportation fuels, it is hard to foresee any further appreciable softening in food prices in December.

• This put the RBI’s forecast for average fiscal third-quarter inflation of 6.8% in jeopardy.

Disrupted supply chain logistics, higher operational and labour costs, higher administrative fuel costs partly contribute to the upward inflation trajectory in recent months.

What is the way forward?

• Policymakers must guard against easing vigilance on prices while considering growth-supportive measures.
• Price stability must remain the monetary authority’s primary target.
• The decline in the CPI inflation print in Nov 2020 to 6.93 per cent from 7.61 per cent in Oct 2020 has definitely come as a relief to the bond markets.