Inflation Conundrum


Note: The below points are useful for mains descriptive answer writing. Remember and memorize the below points for the precise descriptive answers for  CSE MAINS.

The multi-month low retail and wholesale inflation prints for December pose an interesting challenge for policymakers and the central bank.

  • Inflation in Consumer Price Index (CPI), at 2.19% in December, is at an 18-month low, while the Wholesale  Price Index (WPI), at 3.8%, is at an eight-month low. The Reserve Bank appears to have been blindsided by the CPI number, which is way below projections made during its last few monetary policy pronouncements.
  •  The RBI has maintained a CPI projection of 4.4-4.8% for the second half of fiscal 2019. Even in the October policy announcement, the bank projected 3.8-4.5% retail inflation in the second half with upside risk, and even changed its policy stance to “calibrated tightening” from “neutral”.
  • There may be pressure on new governor Shakti Kant Das to look at a rate cut, especially given the weak economic data coming in — factory output growth was a low 0.5% in November with manufacturing showing a contraction.
  • The automobile industry, the first to feel the effect of an economic slowdown, has seen sales falling over the last two months.
  • While headline CPI inflation is trending lower, core inflation is still sticky at close to 6%.
  • Again, there is a divergence between core rural and urban inflation — the former is trending higher at 6.34% while the latter is heading downward at 5.26% in December.
  • Curiously, rural health and education index numbers are high.
  • The point with all this divergence in data is that monetary policymaking is a challenge. The divergences and volatility in different sub-groups is a major challenge in inflation assessment and projection.
  • According to Mr. Das, headline CPI inflation has moderated from around 10% in 2012-13 to 3.6% in 2017-18 and 3.7% in April-December this fiscal.

Wholesale Price Index (WPI): It measures the average change in the prices of commodities for bulk sale at the level of early stage of transactions. The index basket of the WPI covers commodities falling under the three major groups namely Primary Articles, Fuel and Power and Manufactured products. The prices tracked are ex- factory price for manufactured products, mandi price for agricultural commodities and ex-mines prices for minerals. Weights given to each commodity covered in the WPI basket is based on the value of production adjusted for net imports. WPI basket does not cover services.

Customer Price Index (CPI): Consumer Price Index is a measure of change in retail prices of goods and services consumed by defined population group in a given area with reference to a base year. This basket of goods and services represents the level of living or the utility derived by the consumers at given levels of their income, prices and tastes. The consumer price index number measures changes only in one of the factors; prices. This index is an important economic indicator and is widely considered as a barometer of inflation, a tool for monitoring price stability and as a deflator in national accounts.The dearness allowance of Government employees and wage contracts between labour and employer is based on this index.

source: THE HINDU

Note: Inflation issue is in discussion daily. Various Data are available from many sources. There is more chances of question appearing in CSE MAINS regarding Inflation. It is suggested to make a note of these points whenever it is provided.

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