10 Aug 2015 19:23 IST

Inflation is down? Really?

The numbers may look good but the consumer’s monthly budget hasn’t eased up. Here are four reasons why the common man has no respite from inflation

It’s official! Inflation is down. The wholesale price inflation has been in negative territory for the last eight months. CPI, the consumer price-based inflation, has also dropped, from 8-8.5 per cent in the beginning of 2014 to sub-5 per cent now. Inflation in some food items, including cereals and vegetables, is down, according to the index. But consumers do not agree.

In a survey conducted by BusinessLine, to which over 350 people responded, 68 per cent said they still haven’t seen benefits of a lower inflation. Why are the low official CPI numbers not translating into reduced costs for the middle class? Here are some reasons.

1. Inflation in essentials still up

Though overall consumer inflation is down as captured by the official indices, prices of some items that make up an average Indian’s everyday diet are racing higher. These include milk and dairy products, meat, fish and dals. In June, the inflation in milk stood at 7.18 per cent. Dairies, including Amul and Hatsun, increased milk prices more than once in 2014, citing increasing feed prices and labour cost. Subsequently, not just milk prices but also prices of dairy products, including paneer, khoya and sweets, increased. The other item where inflation has been sharp is pulses (dal).

Inflation in pulses stood at 22.2 per cent in June, up from 9.37 per cent in January and 5.7 per cent in June last year. Tur (arhar) and urad dal, which are used to make the typical South Indian everyday staple of idli and sambar , have seen double-digit increase in price.

In Delhi’s retail market, tur dal and urad dal prices have increased from ₹74/kg and ₹77/kg last year to ₹114/kg and ₹110/kg, respectively, now.

The price of chana (chick pea) has also skyrocketed. The Consumer Affairs Ministry doesn’t have data for retail prices of chana but spot prices in the wholesale market as reported by NCDEX, the exchange for agricultural products, show that prices are up over 50 per cent in the last year.

Other protein supplements, such as fish and eggs, also show a similar trend. Data from the National Egg Coordination Committee shows that prices have risen 14 per cent in Delhi in the last one year to ₹3.25/egg and 19 per cent in Mumbai to ₹3.6/egg. In case of fish, varieties such as seer have seen prices shoot to over ₹1,000/kg in Chennai this year from about ₹700-750/kg last year.

The weightage given to the above food items in the official CPI is relatively low. Further, other components of the CPI, such as housing, recreation, fuel and light, mute the impact of price increases in food. Power tariffs, house rent or price of movie tickets increase in a year, but not as frequently or sharply as food prices do. So, they reduce the impact of inflation in food prices on the overall index.

2. Spending pattern is different

To figure out why the common man is not witnessing any relief on the inflation front, BusinessLine conducted a survey to find out the spending pattern of people. Of the 355 respondents, the majority were families of four and from the middle class background.

The exercise showed that for about 26 per cent of the families, expenditure on food accounted for more than 50 per cent of the household budget in a month. Spending on fruits and vegetables is a major drain, accounting for more than 10 per cent of monthly expense, said 74 per cent of the respondents. More than 10 per cent is spent on milk and more than 5 per cent on eggs, fish and meat, said a third of the people in the survey.

This is very different from how food as a whole and within it fruits, vegetables and other items, are given weights in the official CPI. For instance, food and beverages together make up less than half the index. It has a weight of 45.86 per cent. Meat, fish and eggs as one head have a weight of 4.04 per cent, fruits about 2.89 per cent, vegetables 6.04 per cent and pulses 2.38 per cent.

There is no denying the fact that the CPI index has been constructed on a scientific basis, but the diverse set of households used to compute the headline number takes it way off a typical urban household’s experience. The rural CPI gives a weight of 54.18 per cent to food items, but in the combined index the weight drops to 45.86 as in the urban CPI the weight given for food and beverages is only 36.29 per cent.

The Consumer Price Index got a makeover in January this year. In addition to moving the base year from 2010 to 2012, there was tweaking in the weights of some food and non-food items. As a result, the weight of food and beverages fell from 47.58 per cent to 45.86 per cent. Within the food basket, weight for milk dropped to 6.61 per cent from 7.73 per cent and weight for cereals and pulses dropped to 9.67 per cent and 2.38 per cent from 14.59 per cent and 2.65 per cent, respectively. Some food items that saw increase in weight are eggs, fish and meat, vegetables and fruits. In all these three categories, the weight, however, is still relatively small. On the other hand, weights given to healthcare, education, recreation, transport and communication and personal care products have increased.

3. Seasonal factors at play

The common man always compares the price of an item today to its cost a week or month ago, but official CPI numbers are year-on-year comparisons. So, while seasonal supply shortages or market inefficiencies can cause prices of food items to spike sharply compared to the previous month, the increase might be insignificant compared to the year ago. Take the case of potatoes.

The vegetable (fresh potatoes) was selling for an average price of ₹14.9/kg (in Mumbai) in July 2015, lower by almost 42 per cent compared to the same month in 2014. But compared to June, the price was still up 23 per cent (from ₹12.1/kg). This is the case with most vegetables and fruits.

Onion, where the price increase is a politically sensitive issue, also behaves similarly. The price of onion in Lasalgaon, Maharashtra — the largest market for onions in the country — was ₹24.40/kg in July, down 1.3 per cent compared to the price in July last year of ₹24.7/kg.

However, anyone who purchased onions would still have felt the pinch of inflation, as the price was only ₹21.50/kg in June (10 per cent lower than current prices).

In food items, especially fruits and vegetables, arrival pattern is what dictates market prices. Onion, for instance, sees prices move up as May begins and rules high till August/September. Then, as the kharif crop comes to mandis in September-October, prices begin to drop. Prices stay depressed till January-February as the late kharif harvest comes to the market. In vegetables such as tomatoes, where the shelf life is short, prices tend to be more volatile, though year-on-year inflation may not be sharp.

By buying vegetables during their peak season and storing them to use later, one can save some money. For households this is practically not feasible as it involves investment in deep freezers and buying vegetables in bulk quantities. Currently, though the Centre has cold storage facilities, it is well below the required numbers.

A 2013 report by Emerson Climate Technologies India, a global engineering and technology company, says that India’s cold storage capacity needs to increase 40 per cent to avoid wastage. The report revealed that about 18 per cent of the fruits and vegetables produced in India go waste every year because they aren’t stored properly.

4. Because of base effect

‘Inflation’ is a statistical number calculated as the change in percentage from the index number a year ago. So, a high inflation in the past one/two years could mute the current rate of inflation. The consumer price inflation was about 8-8.5 per cent every month in the first five months of 2014. It was only in June that it began declining with a sharp dip from September dragging inflation below 6 per cent.

The muted CPI of 5-5.5 per cent in the last six months of the year thus is also because of the high base. 2015 is a relatively benign year after three successive years of high inflation. In 2014, 2013, as well as 2012, CPI has averaged about 8-9 per cent every month.

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