CONSUMER PRICE INDEX (CPI)
WHY IN NEWS ?
- Recently, Retail inflation in July came in at a 15-month high of 7.44%
WHAT IS CPI ?
- The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels.
- The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.
- Generally, CPI is used as a macroeconomic indicator of inflation, as a tool by the central bank and government for inflation targeting and for inspecting price stability.
- It is also used as a deflator in the national accounts.
- CPI also helps understand the real value of salaries, wages, and pensions, the purchasing power of the nation’s currency, and regulating rates.
- CPI, one of the most important statistics to ascertain economic health, is generally based on the weighted average of the prices of commodities.
- It basically gives an idea of the cost of the standard of living.
- Simply put, CPI specifically identifies periods of deflation or inflation for consumers in their day-to-day living expenses.
- If there is inflation (when goods and services cost more) the CPI will rise over a period of time.
- If the CPI drops, that means there is deflation, or a steady reduction in the prices of goods and services.
HOW IS CPI CALCULATED ?
- To calculate CPI, multiply 100 to the fraction of the cost price of the current period and the base period.
- CPI formula: (Price of basket in current period / Price of basket in base period) x 100
CAUSE OF RETAIL INFLATION SO HIGH :
- Retail inflation is measured using the Consumer Price Index (CPI).
- Nearly two-fifths of the CPI is made up of food items.
- So, if food inflation goes up, the retail inflation rate goes up as well.
- Food inflation over the 12-month period ending July stood at 11.51%.
- It was primarily driven by a sharp 37.34% spike in vegetable prices, with tomato prices rising by a massive 201.54%.
- The prices of ginger, garlic and green chilly rose by 177%, 70% and 50%, respectively.
- Prices of brinjal, okra, beans, pumpkin and cauliflower were also on fire. Onion rose by 11.7% while potato and cabbage fell by 13.3% and 9%, respectively.
INFLATION Vs REPO RATE:
- The RBI tries to control inflation by raising the repo rate, or the interest rate at which it lends to banks.
- In its most recent meeting, it decided to maintain the repo rate at 6.5%.
- The probability of the RBI raising the repo rate is very low primarily because it has no way of controlling food prices.
- Nonetheless, it is likely to maintain the current repo rate primarily because high food prices tend to seep into overall inflation, given that the EMIs on mortgages and other loans are likely to remain on the higher side through 2023.
SYLLABUS: PRELIMS, CURRENT AFFAIRS
