Context: Retail inflation eases to six-year low

Source: The Hindu

Falling food prices drove India’s retail inflation down to a 75-month low of 2.8% in May 2025. The last time inflation was lower than this was in February 2019, according to the Consumer Price Index.

Based on the two months of data available, retail inflation averaged 2.99% in 2025–2026. This is the lowest average for the first two months of a fiscal year since 2017–2018.

Food and beverage inflation decreased from 2.1% in April 2025 to 1.5% in May 2025. For the seventh straight month, food inflation has been declining.

This decrease was caused in part by deflation in essential ingredients including meat, legumes, veggies, and spices.

In May 2025, the price of vegetables fell 13.7%, the price of pulses fell 8.2%, the price of spices fell 2.8%, and the price of meat fell 0.4%.

Model Question:

What are the causes and consequences of retail inflation in India? Discuss the steps taken by the government and RBI to control it.

Model Answer:

Retail inflation, measured by the Consumer Price Index (CPI), reflects the increase in prices of a basket of goods and services consumed by households. It directly impacts the cost of living and the purchasing power of individuals, especially the poor and middle class.

Causes of Retail Inflation in India:

1. Supply-side disruptions: Crop failure due to erratic monsoons or natural disasters increases food inflation.
2. Rising global commodity prices: Imported inflation from oil, food, and fertilizer price spikes affects domestic prices.
3. Fiscal deficits and higher government spending: Especially through subsidies and welfare schemes can fuel demand.
4. Exchange rate fluctuations: Depreciation of the rupee raises the cost of imports.
5. High logistics and storage costs: Inefficient supply chains increase final retail prices.

Consequences:

1. Erodes purchasing power, especially of fixed-income groups.
2. May lead to demand compression, slowing economic growth.
3. Triggers monetary tightening by RBI, affecting investments.
4. Can cause social unrest and dissatisfaction among the masses.

Steps Taken to Control Retail Inflation:

By Government:

1. Export restrictions on essential food items (e.g., wheat, onions).
2. Import duty reduction and buffer stock releases.
3. Promotion of MSP and crop diversification to stabilize food prices.

By RBI:

1. Monetary policy tightening under the inflation targeting framework (4% ± 2%).
2. Repo rate hikes and liquidity management tools like CRR/SLR adjustments.
3. Forward guidance to anchor inflation expectations.

Retail inflation is a critical macroeconomic challenge. A balanced policy approach involving monetary discipline, fiscal prudence, and supply-side reforms is vital for price stability, inclusive growth, and economic resilience.