Context: Retail Inflation at 7-month low as food prices decline

Source: The Hindu

As food prices decreased in February 2025, particularly for vegetables, lentils, and eggs, India’s retail inflation fell to a seven-month low of 3.6%. In January 2025, the annual change in consumer prices was 4.26%.

The Consumer Price Index, which gauges retail prices, has slowed for the fourth straight month and is currently below the 4% inflation target set by the RBI.

The headline inflation rate for February 2025 is 65 basis points lower than that of January 2025. After July 2024, it has the lowest annual inflation rate.

According to NSO data, February saw the weakest increase in the Consumer Food Price Index in over two years, rising just 3.75%.

Urban consumers’ price increases decreased to 3.3% from 3.9% the month before. Inflation for rural consumers decreased to 3.8% from 4.6% the month before.

Telangana had the lowest retail inflation at 1.3%, while Kerala had the highest at 7.3%.

Model Question:

“Retail inflation in India is a major economic challenge that impacts growth and welfare. Analyze the factors influencing retail inflation and suggest policy measures to control it.” (250 words, 15 marks)

Model Answer:

Retail inflation, measured by the Consumer Price Index (CPI), reflects changes in the prices of goods and services consumed by households. It directly impacts purchasing power, cost of living, and monetary policy decisions. In recent years, managing inflation has been a key challenge for policymakers in India.

Factors Influencing Retail Inflation in India:

1. Food and Fuel Prices: Food inflation, particularly in perishable items like vegetables and cereals, is a major driver. Global crude oil prices impact transport costs and overall inflation.
2. Supply Chain Disruptions: Poor logistics, climate shocks, and geopolitical factors (e.g., Russia-Ukraine war) affect supply and prices.
3. Demand-Supply Imbalance: Rising demand, especially post-pandemic, can push inflation higher.
4. Monetary and Fiscal Policies: Loose monetary policies (low interest rates) and high fiscal deficits can fuel inflation.
5. Imported Inflation: Depreciation of the rupee increases import costs, affecting essential commodities.
6. Wage-Price Spiral: Rising wages can lead to higher production costs, causing further inflation.

Policy Measures to Control Retail Inflation:

1. Monetary Policy: The RBI’s Monetary Policy Committee (MPC) adjusts the repo rate to control money supply and demand.
2. Supply-Side Interventions: Strengthening agricultural infrastructure, improving logistics, and buffer stock management.
3. Fiscal Measures: Reducing fuel taxes, rationalizing GST on essential goods.
4. Global Coordination: Managing import dependencies and strategic reserves of essential commodities.

Retail inflation needs a balanced approach combining monetary, fiscal, and structural reforms. While short-term measures like interest rate hikes help control demand, long-term solutions lie in agriculture reform, energy security, and robust supply chains. Ensuring price stability is crucial for sustainable economic growth and social welfare.