India’s retail inflation eased to a five-month low of 4.31% in January 2025, down from 5.22% in December 2024. This decline was driven primarily by a slowdown in food price inflation, which stood at 6%, compared to 8.4% in December, marking the slowest increase since August 2024.
Urban vs. Rural Inflation Trends
Inflation trends varied between urban and rural areas:
- Urban consumers experienced a sharp drop in inflation to 3.87%, falling below the Reserve Bank of India’s (RBI) 4% median target.
- Rural inflation remained higher at 4.64%, though it was still significantly lower than the 5.8% recorded in December.
Food inflation also followed a similar trend:
- Urban food inflation stood at 5.5%.
- Rural food inflation was 6.3%, indicating that rural areas continued to face higher price pressures.
Key Factors Behind the Inflation Decline
According to the National Statistics Office (NSO), the drop in inflation was primarily due to declining price pressures in:
- Vegetables
- Eggs
- Pulses & Products
- Cereals & Products
- Education, Clothing, and Health sectors
Highest Inflation in Specific Items
Despite the overall decline, certain commodities still witnessed high inflation:
- Coconut oil – 54.2%
- Potato – 49.6%
- Coconut – 38.7%
- Garlic – 30.7%
- Peas – 30.2%
Month-on-Month Changes
- The Consumer Price Index (CPI) declined 0.97% from the previous month.
- The Consumer Food Price Index (CFPI) eased by 2.9%, reflecting a moderation in food costs.
This sharp reduction in inflation provides relief to consumers and strengthens expectations that the RBI may hold off on rate hikes in its upcoming monetary policy review. However, food price fluctuations, particularly in vegetables and essential commodities, remain key factors to watch.
Additional Information
Retail inflation in India is measured using the Consumer Price Index (CPI), which tracks the average change in prices of a selected basket of goods and services over time. The National Statistics Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI), releases CPI-based inflation data every month.
- Retail Inflation Rate Calculation
- Inflation is calculated by comparing the CPI of the current month with the CPI of the same month in the previous year.
- The formula for inflation rate (%) is: Retail Inflation=CPI (Current Year)−CPI (Previous Year)CPI (Previous Year)×100\text{Retail Inflation} = \frac{\text{CPI (Current Year)} – \text{CPI (Previous Year)}}{\text{CPI (Previous Year)}} \times 100
Types of CPI in India
- CPI for Industrial Workers (CPI-IW) – Used for wage indexation of workers.
- CPI for Agricultural Labourers (CPI-AL) – Measures inflation for farm workers.
- CPI for Rural Labourers (CPI-RL) – Tracks price changes for rural laborers.
- CPI Combined (CPI-C) – This is the primary measure for retail inflation and includes both urban and rural areas.
Weightage of CPI Components
The weightage of different components in the CPI basket is as follows:
- Food & Beverages – 45.86% (Rural), 29.62% (Urban)
- Housing – 21.67% (Urban only)
- Fuel & Light – 6.84% (Rural), 5.58% (Urban)
- Clothing & Footwear – 6.32% (Rural), 6.18% (Urban)
- Miscellaneous (Transport, Education, Healthcare, etc.) – 26.31% (Urban), 23.30% (Rural)
Why is CPI-Based Inflation Important?
- Monetary Policy – The Reserve Bank of India (RBI) uses CPI inflation to set interest rates and manage economic stability.
- Cost of Living – CPI inflation reflects the real cost of living for consumers.
- Wages & Salaries – Adjustments in minimum wages, pensions, and salaries are based on CPI trends.
The ideal inflation target for India, set by the RBI, is 4% ± 2%. If inflation exceeds this range, the RBI may raise interest rates to control demand, and if it falls below, it may lower rates to boost spending and economic growth.
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