Retail inflation based on Consumer Price Index has risen to an 8 year-high, making daily living more expensive for Indians. Data released by the government showed that retail inflation reached 7.79 per cent in April. It had previously peaked at 8.33 per cent in May 2014. Rising inflation had been pinching pockets since 2019 but with the devastating pandemic and an unexpected war, inflation appears to be getting entrenched. As per the mandate, the central bank is required to keep inflation at 4%, but the RBI has given room for it to rise and fall within two percentage points. India’s retail inflation has been rising since 2019 (when it was 3.7%) but spiked to 6.6% in 2020, breaching the RBI’s upper band of tolerance level. Even as there was some respite last year due to economic recovery after the pandemic, it did not last. April is the seventh straight month that the inflation has gone up. In January 2022, retail inflation stood at 6.01%, in February this rose to 6.07% and in March it was 6.95%. The inflation therefore substantially rose after Russia’s invasion of Ukraine and when consumers started paying more for fuel due to higher crude prices. What is CPI The consumer price index, on which retail inflation is based, is a measure of average change in prices over time that consumers pay for a basket of goods and services. This basket of goods has 3 main categories with different weights. Food weighs 46% on the index, fuel and light are 7% and other items like housing, clothing, footwear etc make up the remaining 47%. With Covid-19 and the Ukraine war wreaking havoc on supply chains, creating shortages and crop yield taking a hit due to various reasons, food and fuel have become costly. Much of the inflation pressure is external, and many other countries including the US are facing such headwinds to growth. Fuel and light Fuel pumps began reflecting the real price of crude oil earlier this year after Russia invaded Ukraine and supply chains were disrupted. India imports 89% of its crude oil needs, a fraction of which is supplied by Russia which was hit by sanctions post February 24. However, while looking for the “best deal for its people” India took advantage of the discounted oil prices in Russia to import fuel from there. India has been making efforts to diversify its supplies for fuel to battle the ever-increasing prices and importing from Russia was a part of the plan. Food basket Inflation in the food basket rose to 8.38% in April from 7.68% in March. It was 1.96% a year ago. Cereals, which have the greatest weight in the food basket, have opened up opportunity and at the same time raised concerns. It is an opportunity for farmers to export wheat, which India usually has a surplus of but in the wake of low production this year due to the heatwave and lower procurement due to higher MSP, there are fears over rising cost of the grain and an impending export ban. The government has so far said it won’t take the export ban route, and it should not, agriculture experts say. Instead, the government could target the massive food subsidy it gives to 800 million Indians and support the import bill for edible oils and fertilizers, which too come largely from the turmoil-hit Black Sea region. The free/subsidised food, most experts argue, should reach those below the poverty line and those above it should pay a reasonable value for what they consume. Wheat exports have witnessed an unprecedented growth of 273% as the world turns to India for its supplies while Ukraine and Russia remain in conflict. At the same time, rice exports have also touched 20 million metric tonnes. Another way to tackle the wheat drain, and which the government is already doing, is to supplement rice for wheat in the free grain distribution scheme (PMGKAY). In the backdrop of rising inflation, Centre and states must cut down unnecessary subsidies, ensuring that only the needy are beneficiaries while those above a certain income level pay for what they consume. Money in the market Meanwhile, post-Covid, the government infused a lot of money in the market to encourage growth. But while consumers had more to spend, there was not enough commodity to spend on due to creaky supply chains which had not fully recovered. The RBI has been trying to mop up the liquidity by raising the repo rate 40 basis points after avoiding such a move for months despite growing inflation. Most estimates suggest that the RBI’s move was necessary but delayed and it would have to raise repo rates and the Cash Reserve ratio few more times this year to soak up the excess cash.