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Easing of CPI Inflation
Context:
Inflation in India’s consumer prices fell from 5.1% in June to an almost five-year low of 3.54% in July,this also marks the first time since September 2019 when it has dropped below the 4% median target pursued by the Reserve Bank of India (RBI) in its monetary policy framework.
More in News:
- The decline in headline inflation was accompanied by a rise in core inflation (excluding food and energy prices), which is estimated at 3.5%, from 3.1% in June.
- Skewed data: Among the 22 States for which inflation rates are released, seven recorded higher inflation than the national average.
Reasons for low Retail Inflation :
- This was driven by the base effect from July 2023 when retail inflation stood at 7.4%.
- Easing Food Inflation and Stable Fuel Prices:Food inflation eased significantly, falling from 9.36% in June to 5.42% in July, due to lower prices for vegetables, fruits, and spices.
- Additionally, stable fuel prices, which decreased by 5.48%, helped reduce transportation costs, contributing to the overall drop in inflation.
- Monsoon Impact: The favourable progress of the monsoon season has positively affected agricultural production.
- Adequate monsoon conditions can enhance food supply, leading to lower food prices and reduced inflationary pressure.
- Central Bank’s Stance: The Reserve Bank of India (RBI) has kept interest rates unchanged, adopting a cautious monetary policy stance amid concerns about food inflation.
- Higher interest rates lead to lower lending thus lower inflation.
- The current low inflation rate gives the RBI some flexibility to support economic growth without immediate pressure to adjust rates.
Impact of High Retail Inflation:
- This may lead to revision and a rise in the Repo rate.
- Repo rate revision affects bond Yield in the Financial market .
- According to the Economic survey 2023-24 a low CPI is reflected in the downward trajectory of the macroeconomic vulnerability index – an index constructed by combining India’s fiscal deficit, CAD and inflation.
- The easing of price pressures could boost consumer confidence and spending, supporting economic growth.
- India’s GDP is expected to exceed 7% in Q1 FY25, indicating strong domestic growth momentum.
World-level CPI trends and Inference:
- According to the Economic Survey 2023-24, India is better placed than most countries in Inflation targeting.
- Global inflation has been decreasing recently, with the Consumer Price Index (CPI) inflation rate hitting a five-year low of approximately 3.5% in July 2024.
- Stable food and fuel prices have contributed to lower inflation in India and other countries.
- Globally, central banks have aggressively raised interest rates to control inflation.
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