High retail and wholesale inflation: Reasons and Possible actions by the policymakers
The news about high retail and wholesale inflation is hitting the headlines of every newspaper for various reasons. The obvious one is that it has a high impact on the cost of living. Besides that, let’s discuss its impact on our daily lives, Target Vs Actual inflation, possible steps to be taken by the government, and most importantly the reasons behind it.
Retail and Wholesale inflation explained
The inflation experienced in the retail markets i.e. experienced at the consumer level is known as retail inflation. In India, CPI is an indicator of retail inflation which encompasses 448(rural) and 460(urban) commodities and services. The CPI data is released by The Central Statistics Office (CSO), Ministry of Statistics and Program Implementation every month. Wholesale inflation, on the other hand, is represented by WPI in India, which measures the changes in the price of goods at a wholesale level (Trades amongst organizations) and includes 697 commodities. The WPI data is published by the Office of Economic Advisor (Ministry of Commerce and Industry) every month.
What is the reason behind high inflation (Both retail and wholesale)?
The current CPI data revealed that retail inflation stands at 7.35% which is at its 5.5 year high, whereas WPI data revealed that wholesale inflation stands at 2.59 per cent, highest in eight months. The reasons for rising inflation can be attributed to the following factors:
Food Inflation: The CFPI (Consumer Food Price Index) indicated that food inflation has surged to 14.12 per cent YoY. The vegetable prices skyrocketed in December, which has been a cause of concern for many. The vegetable inflation rate YoY stands at 60.5%, pulses and products at 15.44%, and meat & fish at 9.57% as per CPI data.
Fuel prices: The fuel prices have observed a northward trend over the past few years. The petrol and diesel prices have been continuously increasing with the increase in crude oil prices (which were impacted by the attack on Saudi Arabia’s Aramco Oil, further the prices are going up because of the tensions between US and Iran). Fuel prices impact the prices of almost every commodity as the transport cost increases, hence the burden is shifted to the consumers, who end up paying more.
Personal Care: The YoY percentage change in personal care commodities and services prices have experienced an upsurge of 6.28%. Personal care is an important component of CPI as with the changing trends people have started spending on personal care.
Other reasons: The recreation and amusement segment has observed an inflation rate of 4.02%, Education has observed an inflation rate of 3.73%, and transportation and communication observed 4.77%.
Target Vs Actual
India’s target inflation is 4 per cent, with an upper tolerance level at 6% and lower tolerance limit at 2%. The CPI has breached the upper tolerance limit and currently stands at 7.35%. This is a major concern for the economy as India’s GDP is growing at a slower rate and the inflation rate is breaching the upper tolerance limits. If the policymakers do not take steps to curb these issues, India can observe stagflation (slower economic growth combined with high inflation).
Who is affected the most?
The households are finding it difficult to manage their monthly budgets with such inflationary pressures, hence the savings are expected to go down. Which is also evident from the RBI data for the previous years, we’re expecting the savings rate to go down further if the inflationary problems are not curbed.
Moreover, the unemployment rate being 6.1%, is also a major concern when its coupled with inflationary conditions.
Possible Move by the Policy Makers
From the past trend of RBI’s monetary policy, we have observed that it has been cutting the repo and reverse repo rates. The current repo rate is 5.15%, whereas the reverse repo rate is 4.9%.
Looking at the current scenario, RBI should maintain its current monetary policy. A rate hike will impact the lending that the households are doing, and the savings will be impacted as well. Thus, cutting rates or hiking them could cause more damage to the existing situation. Hence, we’re expecting the RBI to maintain the key rates in their next policy meet.