Page 534 - ES 2020-21_Volume-1-2 [28-01-21]

05

Prices and Inflation CHAPTER

CPI-Combined (C) inflation has moderated since 2013-14. However, inflation dynamics have
changed considerably in 2020. Overall, headline CPI inflation remained high during the
COVID-19 induced lockdown period and subsequently, due to the persistence of supply side
disruptions. The rise in inflation was mostly driven by food inflation, which increased to 9.1
per cent during 2020-21 (Apr-Dec). Due to COVID-19 induced disruptions, an overall increase
in the price momentum is witnessed, driving inflation since April 2020, whereas positive base
effect has been a moderating factor. The difference in rural-urban CPI inflation, which was
high in 2019, saw a decline from November 2019 that continued in 2020. Inflation ranged
between 3.2 per cent to 11 per cent across States/UTs in 2020-21 (Jun-Dec) compared to (-) 0.3
per cent to 7.6 per cent in the same period last year. Thali prices for both vegetarian and non-
vegetarian Thalis declined significantly in January-March 2020 before rising sharply during
April to November in both rural and urban areas before easing in December 2020. The easing
in CPI-C is expected to ease Thali prices going forward.
The Survey finds that sole focus on CPI-C inflation may not be appropriate for four reasons.
First, food inflation, which contributes significantly to CPI-C is driven primarily by supply-side
factors. Second, given its role as the headline target for monetary policy, changes in CPI-C
anchor inflation expectations. This occurs despite inflation in CPI-C being driven by supply-
side factors that drive food inflation. Third, several components of food inflation are transitory
with wide variations within the food and beverages group. Finally, food inflation has been
driving overall CPI-C inflation due to the relatively higher weight of food items in the index.
While food habits have undergone revisions over the decade since 2011-12, which is
base year of CPI, the same is not reflected in the index yet. The base year of CPI therefore
needs to be revised to overcome the measurement error that may be arising from the change
in food habits. For all these reasons, a greater focus on core inflation is warranted. Further,
given the significant increases in e-commerce transactions, new sources of price data capturing
e-commerce transactions must get incorporated in the construction of price indices. During
the year, the government took several measures to make crucial drugs for COVID-19 treatment
available at affordable prices, to stabilise prices of sensitive food items like banning of export
of onions, imposition of stock limit on onions, easing of restriction on imports of pulses etc.
However, consistency in import policy of sensitive food items warrants attention as frequent
changes in import policy of pulses and edible oils adds to confusion and delays. To rein in
the vegetable inflation, review of relevant buffer stock policies is essential. To avoid supply-
side disruptions that cause inflation seasonality in vegetables, food, CPI-C and in inflation
expectations, a system needs to be developed to reduce wastages and ensure timely release
of stock.