Economy
The causes and consequences of falling inflation
Summary
- In October, the CPI dipped to a 3-month low of 6.77%, while the WPI dropped to a 19-month low of 8.39%.
After an extended stretch of rising prices, wholesale and retail price indices in India cooled in October 2022, potentially offering some relief to the common man. Will the trend sustain and what are the implications? Mint analyses.
What has been the trend in inflation?
In October, the consumer price index (CPI) dipped to a three-month low of 6.77%, while wholesale price index (WPI) inflation, which has been in double digits for over a year and half, dropped to a 19-month low of 8.39%. For quite some time, inflationary pressures have been increasing in India as well as across the world, worrying policymakers. International Monetary Fund forecasts global inflation to rise from 4.7% in 2021 to 8.8% in 2022 but decline to 4.1% in 2024. The Reserve Bank of India’s September 2022 projections for the country have pegged CPI inflation at 6.7% in FY23.
How does it affect the common man?
The CPI gives higher weightage to primary products including food and beverages at 45.86%, while the WPI gives a higher weightage to manufactured products at 64.2%. Changes in retail inflation are driven by consumer demand and available supply. For the common man, rising CPI signals weakened buying power, and poorer standard of living. The consequent fall in demand, especially for non-essential products, leads to lower production levels, and results in investors adopting a ‘wait and watch’ approach. Meanwhile, a rise in CPI leads to a hike in dearness allowances for many employees in the industry and the government.
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Why is the retail price index lower than WPI?
Historically, the CPI has been higher than the WPI. However, in the last year and a half, it has fallen below WPI. The crisis after the pandemic constrained demand. It could have led to manufacturers absorbing part of the cost. They may not have passed on higher input prices — an outcome of supply chain constraints and the Russia-Ukraine war — to consumers.
What caused the softening inflation?
Wholesale inflation seems to have cooled faster than at the point of retailers, primarily driven by softening prices of metals and metal products, mineral oils, chemicals and textiles. While food inflation in October was at 7.04%, effective supply chain management of essential commodities by the government may have helped. Also, since April 2020, the government has been insulating vulnerable sections of the society though free distribution of foodgrains. This resulted in an overall expenditure of ₹3.91 trillion.
How should policy makers read the trend?
As inflation eases, it is time for the RBI to rethink its approach on policy rates. Credit disbursal numbers show that rate hikes have not deterred investors from availing credit support. Softening CPI would encourage the common man to increase spending on non-essential products. This would boost the industrial sector in particular and the economy as a whole. The government will gain higher revenue, and public goodwill.
(Contributed by Jagadish Shettigar and Pooja Misra, faculty members at BIMTECH).
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