Any hope that our battle against inflation is ended has been dashed by estimates of inflation based on the consumer price index (CPI) that the Indian ministry of statistics and program implementation provided for the month of January. The decline in inflation rates for November and December was relatively brief, as inflation in January rose to 6.52 percent, back beyond the Central Bank of India's (RBI) upper bound, and reached 6.85 percent in rural regions.

But what surprised a lot more than total inflation was food inflation. The inflation rate for cereal was above 16percent in January, the highest level since the new series was introduced, while the inflation rate for consumer food prices as a whole rose from 4.2percent in December to six percent in that month. Price pressures were also more pronounced in rural areas for grain, with rural cereal inflation estimated at 17.2percent, which is much higher than the average in urban areas of 13.8percent.

Why Inflation is Higher in the Rural Parts than the Urban

According to reports from the Ministry of Statistics and Programme Implementation, India's rural areas had greater inflation rates than its cities for the first seven months of this year. While it remained more moderate than in urban regions throughout 2020, the inflation rate in the hinterland was greater than in urban areas for six months of 2021.

The method used to generate the figure for the two regions is one of the main causes for rural India's higher inflation rate. The Consumer Price Index (CPI), a gauge of inflation, essentially tracks the price changes of a collection of commodities that are given weights based on their significance. The products are further divided into broader categories, including miscellaneous, food and beverages, clothing and footwear, housing, fuel and light, and pan, tobacco and toxicants.

The weightage given to particular groups of commodities is the primary distinction between computations of the rural and urban inflation rates. The food and beverage industry alone accounts for around 54.18 percent of the CPI basket in rural areas. For metropolitan areas, the same sector has a weight of 36.29 percent, making up slightly more than a third of the consumption basket. The CPI index for urban regions includes house price trends, but not for rural areas, which accounts for the lower weighting. This implies that customers in rural areas are more vulnerable to food inflation than consumers in urban areas, which is exactly what has happened.

The difference between the rural and urban CFPIs, which were 8.04 and 7.04 percent, was 100 basis points.

Given that India has already seen a similar pattern prior to 2017–18, the data may create the impression that rural inflation exceeding urban levels is not unusual. Just recently have the roles been reversed. Nonetheless, experts still consider it to be a problem.

According to experts, when there is uncertainty regarding food production, a higher rural inflation rate is not a good indicator as prices have been beyond the bearable range of four to six percent for the previous six months in a row.

Prices Rise Spreading from Wheat to Other Food Items

First, cereal inflation, which is predominantly caused by the price of wheat, is still a problem. But, the same pressures have also moved to other food items. Even though rice inflation was at 10 percent amid a rising trend in recent months, wheat prices jumped by 25percent from a year earlier, a record high in the past ten years. Among food, milk and eggs also revealed 9percent inflation and an upward trend. Up until October of last year, egg inflation was negative, but it has since increased significantly.

Second, while the problem of food inflation still exists, it has now expanded to other goods and services, making it far more widespread. The only category with an inflation rate under 6percent was transportation and recreation, with a combined weight of about 9–10percent. Inflation was 6percent or more for the remaining non-food group, which makes up more than 50 percent of the weight in rural areas. Clothing and footwear inflation was 9.1percent, fuel and light inflation was 10.8percent, household goods and services inflation was 7.3percent, health inflation was 6.4percent, personal care inflation was 9.6percent, and miscellaneous inflation was 6.2percent.

The nature of the present inflationary wave and the necessary policy response are also questioned by these disaggregated estimates.

Need for Policy Change

Due to stagnant salaries and diminishing agricultural revenues, the rural economy is still in trouble. It is alarming to say the least that even the urban middle class is not faring any better. So, it is not surprising that rate increases by the RBI have so far had no impact on curbing inflation. Monetary policy is unlikely to be of any assistance in a demand-constrained economy, especially in the case of grains, which are an essential consumption item. Given a drop in the price of most food items internationally, food inflation is less of a problem in developed countries like India where it is primarily driven by cereal and food in general.

But, this raises a new question. Why are commodities like grains increasing in price at this rate even while wages aren't rising and global prices have fallen since their peaks?

 

Cost-push pressures are essentially present for cereals and are aggravated by supply disruptions. Even though there were already rising cereal prices prior to the Ukraine-Russia conflict, these pressures intensified as a result of a poor domestic wheat crop during the previous rabi season due to a heat wave and a subsequent decline in rice production during the following kharif crop due to uneven and insufficient monsoon rainfall.

The government also bears some of the blame for disregarding warnings of rising wheat prices and acting decisively only much later, with an export ban.

It is unlikely that India's ongoing food inflation would soon end. Even the meager 5 kg of free foodgrain each person that was offered until December has been discontinued. While this is probably going to reduce demand, it's also probably going to increase pressure on price levels generally. Wheat prices have not decreased as a result of the government's attempt to deplete Food Corporation of India (FCI) reserves through open market sales. The main concern is that there will be weak production again next year as a result of another heatwave. Cereal inflation is particularly sticky, necessitating a distinct approach that includes not only providing subsidized inputs but also safeguarding standing crops from adverse weather.