Food Inflation and WPI in India

Understanding Food Inflation in India: Causes, Impact, and Policy Measures

Food inflation in India has become a pressing concern, with consumer food prices surging by 9.9% in August 2023 compared to the same month in the previous year. This surge, coupled with an overall retail inflation rate of 6.8%, significantly exceeding the target of 4% and the upper tolerance limit of 6%, has sparked interest and concern. In this article, we delve into the meaning and calculation of inflation, explore the Wholesale Price Index (WPI), and understand the role of the Monetary Policy Committee (MPC) in managing inflation.

Understanding Inflation:

Inflation is the general increase in the prices of goods and services, resulting in a decrease in the purchasing power of consumers. When inflation rises without a corresponding increase in income, consumers can buy fewer goods or must pay more for the same items. Rising inflation implies that the rate at which prices rise is accelerating.

Measuring Food Inflation in India:

Inflation can be calculated using various price indices, including producer, consumer, and wholesale prices, each serving a distinct purpose. The Producer Price Index measures prices received by domestic producers, while the Consumer Price Index (CPI) measures average consumer prices. The Wholesale Price Index (WPI) focuses on average prices in the wholesale market, where goods are sold in bulk.

What is the Wholesale Price Index (WPI)?

The WPI tracks changes in the prices of goods traded in bulk by wholesale businesses. It is vital for understanding supply and demand dynamics in industry, manufacturing, and construction. The WPI is released monthly by the Economic Advisor in the Ministry of Commerce and Industry and helps gauge wholesale inflation in the economy.

Components of WPI:

The WPI consists of three major components:

1. Primary Articles (22.62%): Includes Food Articles (e.g., cereals, vegetables, milk) and Non-Food Articles (e.g., oilseeds, minerals).

2. Fuel & Power (13.15%): Monitors price movements in petrol, diesel, and LPG.

3. Manufactured Goods (64.23%): Encompasses various manufactured products, including textiles, chemicals, and food items like sugar.

Headline vs. Core Inflation:

Headline inflation considers all items in the basket, while core inflation excludes food and fuel items, making it less volatile. In developing countries like India, where food and fuel account for a significant portion of expenses, headline inflation is more relevant.

Difference Between WPI and CPI:

WPI tracks wholesale prices of goods, whereas the Consumer Price Index (CPI) measures average prices paid by households for a basket of goods and services. The RBI shifted its focus from WPI to CPI for inflation measurement on the recommendation of the Urjit Patel Committee in 2014.

Role of the Monetary Policy Committee (MPC):

The MPC, consisting of six members, including the RBI Governor, is responsible for setting the policy rate (Repo Rate). It operates as a statutory body and was established to adopt inflation targeting as India's Monetary Policy Framework. The CPI inflation target was set at 4%, with a tolerance band of ±2%. The committee meets quarterly to make decisions, with the Chairman having a casting vote in case of a tie.

Conclusion:

Food inflation in India has significant implications for consumers, and understanding its measurement through indices like the WPI and the role of the MPC in managing inflation is crucial. Policymakers continue to grapple with the challenge of maintaining price stability while fostering economic growth in the face of rising food prices.

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