Retail Inflation Declines, Yet…

By: Sutanu Guru

Persistently and stubbornly high food inflation continues to hurt middle and lower middle class families.

Supporters of the third Narendra Modi regime should be clapping and cheering. After almost five years, the retail inflation rate based on the consumer price index has declined to just about 3.5%. According to the self imposed inflation guidelines by the Rserve Bank of India, retail inflation should not cross 4%. Further, while retail inflation between 4% to 6% can be tolerated, anything above 6% is not acceptable. Since the Covid pandemic hit India, it has been extremely rare for retail inflation to be below 4%.

The accompanying chart shows that retail inflation dropped below 4% for the first time in thirteen months since July 2023.  Yet, there are no visible signs of cheer and relief in policy circles though the news is just about a day old. Significantly, the RBI has just recently maintained the key bank interest rate at 6.5% because it is still officially wary of and worried about inflation. High interest rates often act as a deterrent on capital investment.

Why does “high and rising prices” dominate the narrative even when the retail inflation rate has dropped to 3.5%. The answer lies in food. Food items account for a 46% weight in the consumer price index that is used to calculate retail inflation. And food prices have remained stubbornly high. For instance, food inflation in July 2024 is more than double the 3.5% retail inflation rate. Though there has been an easing in vegetable prices, inflation rates for cereals, pulses, meat and oil continue to remain high. For high income households, such things are immaterial as they spend less than 5% of the family income on food. But the impact of food inflation starts intensifying as one moves down the family income scale.   

The average aspirational Indian family spends more than 50% of its income on food items. They have been hit the hardest for some years as food inflation has persistently hovered around the double digit mark. Shorn of jargon, even a rise of a few Rupees per kilogram or litre upsets the family budgets of aspirational households. This is precisely the reason why close to two thirds of respondents in the CVoter tracker surveys say they find it very difficult to manage family budgets.  

So the headlines will scream that retail inflation has fallen dramatically while Indian households will keep complaining about high and rising prices.