Consumer-based inflation

Consumer-based inflation, often referred to as retail inflation, measures the change in the overall price level of a basket of goods and services that households typically consume. In India, retail inflation is most commonly represented by the Consumer Price Index (CPI). It reflects the rise in the cost of living and directly impacts consumers by indicating how much prices for essential goods like food, clothing, housing, and healthcare have changed over time.

Key Points on Consumer-based (Retail) Inflation:

1. Consumer Price Index (CPI)

• Definition: The CPI tracks the prices of a specific set of goods and services, often referred to as a “basket,” consumed by a typical household. CPI measures the percentage change in prices over time, which helps to determine inflation levels.
• Categories: The CPI in India includes various categories like:
  • Food and beverages
  • Housing
  • Clothing and footwear
  • Health
  • Education
  • Transportation

2. Types of CPI in India

• CPI for Urban Non-Manual Employees (CPI-UNME)
• CPI for Industrial Workers (CPI-IW)
• CPI for Agricultural Laborers (CPI-AL)
• CPI-Rural
• CPI-Urban
• CPI-Combined (most widely used, covering both urban and rural areas)

The CPI-Combined is the most important indicator used to calculate overall retail inflation in India.

3. Factors Contributing to Retail Inflation

• Food prices: In India, food accounts for a large portion of the CPI basket, making it one of the biggest contributors to retail inflation.
• Fuel and transportation costs: Fluctuations in oil prices and transportation costs can significantly impact retail inflation, especially since India imports a large portion of its crude oil.
• Housing costs: Changes in rent or housing prices are also part of the CPI.
• Core inflation: This measures inflation excluding volatile items like food and fuel, offering a more stable indicator of long-term inflation trends.

4. Impact of Retail Inflation

• Cost of Living: Rising retail inflation directly affects household budgets, reducing consumers’ purchasing power. Higher inflation means households can buy fewer goods and services for the same amount of money.
• Monetary Policy: Retail inflation plays a crucial role in the Reserve Bank of India’s (RBI) decision-making. If inflation rises above the RBI’s target (currently 4% with a tolerance band of +/- 2%), the central bank may increase interest rates to control inflation.
• Wages and Pensions: CPI is often used to adjust wages and pensions to ensure that they keep pace with the cost of living.

5. Recent Trends in Retail Inflation in India

• Food Inflation: Retail inflation in India has often been driven by food inflation, particularly during times of supply chain disruptions, weather anomalies, or agricultural shortages.
• Impact of Global Factors: Global oil prices and geopolitical factors, such as the Russia-Ukraine conflict, have contributed to rising inflation due to increased fuel costs, affecting transportation and overall pricing in the economy.

6. Difference Between Retail Inflation (CPI) and Wholesale Inflation (WPI)

• CPI vs WPI: While CPI measures the inflation experienced by consumers at the retail level, the Wholesale Price Index (WPI) measures the inflation at the wholesale level (prices before goods reach the consumer).
• Scope: CPI is more relevant for households as it reflects retail prices, whereas WPI is more focused on businesses and manufacturers. The RBI uses CPI data to gauge inflation for monetary policy, as it reflects consumer-level inflation.