If inflation is so low, why doesn’t it feel like it?
The rate of price rise has fallen, but prices are still going up year-on-year
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Retail inflation, as measured by consumer price index (CPI), was at a 17-month low of 2.33% in November. This means prices were 2.33% higher than those a year ago. But, why doesn’t it feel like inflation has fallen to such a low level?
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Have prices really fallen?
Inflation is basically the rate of price rise. CPI inflation in January this year was at 5.07%, but by November, it had fallen to 2.33%. This means that the rate of price rise has fallen, but prices are still going up year-on-year. Economists call this fall in rate of inflation, disinflation. Take a look at CPI inflation, the middle curve in the chart above. It has been coming down since June this year. Food and beverages account for a little under half of consumer price inflation. As can be seen from the bottom curve in the chart, food prices, on the whole, have been falling since the beginning of the year.
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So, is CPI inflation low because of a fall in food prices?
Yes. Food prices experienced deflation in November and fell by 2.61%. Deflation is the opposite of inflation and refers to a situation where prices are falling. Specifically, prices of vegetables were 15.59% lower last month than what they were a year earlier. This slump is clearly visible in several news reports of farmers selling their produce at rates much below the cost of production. Over and above this, prices of pulses were down 9.22%, whereas those of sugar and confectionaries had also gone down by 9.02%. This deflation is clearly hurting farmers.
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This means low inflation is because of deflation in food prices?
Yes. The prices of items other than food, which are part of the consumer price index, have been on their way up.
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How does the situation look if we look beyond food prices?
Take a look at CPI inflation (after leaving out food, fuel and light items) in the top curve of the chart above. It has been 5% or higher through this year. In November, housing prices went up by 5.99%, healthcare costs shot up by 7.16%, expenditure on transport and communication was up by 6.09% and education by 6.64%. As people earn more, these are the things they spend a bulk of their money on. The proportion of their income spent on food comes down.
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Is there any other factor that influences inflation?
Inflation also varies depending on which part of the country you live in. In November, Jammu and Kashmir recorded the highest inflation of 6.25% among all states. Both Bihar and Assam came in next with 5.26%. A few states experienced deflation last month. These are Himachal Pradesh, Andhra Pradesh and Chhattisgarh. Prices in these states fell by 2.38%, 2.17% and 0.28%, respectively.
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Vivek Kaul is the author of the Easy Money trilogy.
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