How does India measure retail inflation?

Inflation is the rate of change in the prices of a given set of items. 

• India bases its retail inflation metrics on the Consumer Price Index (CPI).
• The index records changes in prices for a sample of family budget items that are representative of what consumers typically spend their household income on — food, fuel, housing, clothing, health, education, amusement and even paan, tobacco and intoxicants. 
• The measure is based on a weighted average. 
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• That is, some items in the index may get greater weightage depending on their priority in a typical family’s budget. 

• The CPI-based retail inflation is measured monthly and is published as a percentage value of change in the index from the corresponding year-earlier period. 
• Data for a certain month are released by the Ministry of Statistics and Programme Implementation generally on the twelfth day of the subsequent month.

Why is faster inflation a concern for policymakers?

• Faster retail inflation is indicative of prices of household items rising quickly. 
• While inflation affects everyone, it is often referred to as a ‘tax on the poor’ as the low-income stratum of society bears the brunt. 
• Persistent high inflation pushes several items out of reach for this category of consumers. 

For example: 

Onions and potatoes are generally a key staple in an average Indian family’s diet. But, if the price of potatoes starts rising rapidly, a poor household is often forced to sharply reduce or forgo its consumption of this key source of essential nutrients, including carbohydrates. 

• Over time, if unchecked, persistent high inflation erodes the value of money and hurts several other segments of the population, including the elderly living off a fixed pension. 
• It hence ends up undermining a society’s consumptive capacity, and thereby, economic growth itself.

What is the RBI’s role in tackling inflation?

The RBI’s explicit mandate is to conduct monetary policy. 

According to RBI’s website: 

“The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.”

• In 2016, the Reserve Bank of India Act, 1934, was amended to provide a statutory basis for the implementation of a flexible inflation-targeting framework.
• Thus the Centre and the RBI would review and agree upon a specific inflation target every five years. 
• Under this, 4% was set as the Consumer Price Index (CPI) inflation target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6% and the lower tolerance limit of 2%. 
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• The RBI through its MPC constantly assess current levels of inflation and prices of various goods and services in the economy.

• RBI also take into consideration inflation expectations both of consumers and financial markets so as to use an array of monetary tools, including interest rates, to contain inflation within its target range.

Source: The Hindu