What can we infer from the December inflation numbers on the budget and monetary policy?

What can we infer from the December inflation numbers on the budget and monetary policy

What can we infer from the December inflation numbers on the budget and monetary policy?

How is CPI inflation determined and what does it mean? What information about inflation in December is noteworthy? We clarify

According to the most recent official announcement, India's inflation rate, which is based on the consumer price index (CPI), was 5.7% in December. Even though this is a monthly release, there are a few reasons why the time is crucial.

First, this is the last inflation statistics to be disclosed in terms of fiscal policy prior to the Union Budget's presentation on February 1. Second, this will be the most recent information that the Monetary Policy Committee has access to in terms of monetary policy. prior to the Reserve Bank of India's reorganization in late February. Last but not least, because this is the first publication in an election year, it can have more political significance than normal.

CPI inflation: what is it?

All that is known as CPI inflation is the rate of inflation that affects consumers. This is not the same as the Wholesale Price Index-based inflation rate, which is the primary inflation measure.

The consumer price index, defined by the Ministry of Statistics and Program Implementation (MoSPI), which disseminates the data, "measures changes over time in the general level of expenses of a basket of selected services and products that households acquire for consumption purposes."

There are now 299 products in the CPI basket for all of India.

Consumer pricing indices are produced for both urban and rural consumers in addition to the overall index.

How is the computation made?

2012 serves as the "base year" for the current index series. Put another way, the price index for 2012 is set to 100, and the rates of inflation for each item and service are then determined by taking changes from these price levels.

The National Statistics Office of MoSPI reports that 1181 villages and 1114 metropolitan marketplaces nationwide provide monthly pricing data. Weekly data collection for this purpose is done by NSO field workers.

What make up its components?

The six primary components of the CPI each include a variety of sub-components and varying weights. The following are the major elements:

1.> Food and Drinks

2> Tobacco, alcohol, and pan

3> Footwear and clothes

4> Dwelling

5>Light and fuel

6> Miscellaneous (health care, education, and other services).

Currently, food items make about 54% of the entire index weight. Other services make up the second greatest portion. Grain prices are the biggest contributor in the food sector, making about 12.4% of the CPI overall.

This implies that the largest contributor to rising consumer inflation is the price of food goods such as cereals, vegetables, milk, and pulses. Food goods are highly valued since, for the most part, Indian consumers spend a significant portion of their money on addressing their food needs.

What does the information reveal?

There are two methods to examine the inflation rate for any given era. One is to examine current December's price level and contrast it with the December price level of the previous year. Year-over-year growth is the formula used to calculate the inflation rate, or the pace at which prices have risen. This inflation rate is the most often used one.

However, by comparing the prices in December and November, one may easily compute variations from month to month.

By the end of 2023, the data indicates that the annual inflation rate has begun to increase. However, December's MoM data indicates deflation.

Deflation is the term used to describe a decline in prices over time. It is important to clarify that deflation is not the same as deflation (a drop in the rate of inflation from month to month).

December's increase in year-over-year inflation was caused, among other things, by the relative increase in food costs. Notably, compared to December 2022, the cost of vegetables rose by over 28%, while the price of pulses and spices jumped by 21% and 20%, respectively. Moreover, grain increased in price by 10%. The entire inflation rate increased as a result of the very high rates of inflation in just these four food categories, which make approximately 23% of the total index weight.

Finally, as usual, inflation rates differed throughout the nation, with Odisha posting the highest inflation at 8.7% and Delhi the lowest at 2.9%.

What significance does it have?

Most experts, including Deepti Deshpande of CRISIL, predict that inflation would drop in the next months due to government assistance and the kharif crop, which will lower food prices. In general, it is anticipated that the rate of inflation will be 5.5% for the duration of the fiscal year, and it will reach 5% in March 2024.

Furthermore, the core inflation rate, or the inflation rate after fuel and food prices are subtracted, is heading down despite what is occurring with headline inflation.

But according to Monnet, the most recent inflation statistics will probably cause interest rate reductions (read: EMIs) to be postponed, in line with Eri Policy. There were those who predicted the RBI would lower rates as early as April this year, when the trend in inflation reversed and surged in November and December. But it doesn't seem probable anymore. that prior to August, the RBI will lower interest rates.

It's crucial to remember that the RBI thinks food shocks may have unintended consequences that make it more difficult to implement policy goals. As a result, we think it unlikely that the RBI would alter its position on monetary policy or rates very soon. In other words, we believe that in August 2024, the growth-inflation dynamics that are anticipated will begin to decline. May lead to modest rate cuts,” said Indranil Pan, chief economist at Yes Bank.

For those who set budgetary policy, high inflation is also bad news. This is partially due to the potential political implications of increased inflation rates so close to elections. But it's hardly welcome uncertainty about inflation, especially when creating budgets.