Consumer Price Index Inflation (CPI) subsided slightly to 7 percent in June from 7.04 percent in May. Still above the tolerance limit of the Bank of India Reserve (6 percent) for the sixth month in a row. While the edible price of oil shows the price of moderation, cereals and vegetables still increase. Cutting the task of gasoline and diesel provides some assistance, but service inflation is likely to continue to increase due to the reopening of the economy and the revival of demand.

While the national inflation rate shows moderation from May to June, among the states, Telangana recorded the highest inflation rate in more than 10 percent in June, higher than 9.45 percent reported in May. Furthermore, Rural Telangana inflation is above urban inflation.

Showing the possibility of traffic jams, inflation is also seen to increase in states and unity areas such as Jammu and Kashmir, Ladakh, Arunachal Pradesh, and Sikkim. Conversely, four states – Tamil Nadu, Kerala, Himachal Pradesh, and Delhi – have a little more than 5 percent of inflation. Bihar reported the lowest inflation among all major states (4.68 percent). The combination of increase in food prices and accumulation of core inflationary pressure explains the increase in prices in the state.

Understanding CPI State level

The main component of CPI is a household consumption basket. The weight of various items in the commodity basket at the CPI state level is determined based on the part of each item in total household consumption expenditure throughout the state.

This stock was obtained from a consumer expenditure survey (CES), conducted by the national sample survey organization. This survey is designed to gather information about household consumption expenditure patterns throughout the country, both urban and rural areas. The weight for the CPI series is currently based on CES conducted in 2011-12, with the reference period July 2011 to June 2012. This exercise is carried out for rural and urban areas in all states. Weights for rural Urban CPI and CPI for each state are then determined based on parts of goods in their consumption expenditure.

Reflecting the differences in consumption patterns, there are vast variations in different commodity weights among countries. For example, the weight of ‘food and drinks’ in the rural area of ​​Kerala is 44.07, while in the rural Assam the part is 62.79. The weight also varies between rural and urban areas for each state.

This stock was obtained from a consumer expenditure survey (CES), conducted by the national sample survey organization. This survey is designed to gather information about household consumption expenditure patterns throughout the country, both urban and rural areas. The weight for the CPI series is currently based on CES conducted in 2011-12, with the reference period July 2011 to June 2012. This exercise is carried out for rural and urban areas in all states. Weights for rural Urban CPI and CPI for each state are then determined based on parts of goods in their consumption expenditure.

Reflecting the differences in consumption patterns, there are vast variations in different commodity weights among countries. For example, the weight of ‘food and drinks’ in the rural area of ​​Kerala is 44.07, while in the rural Assam the part is 62.79. The weight also varies between rural and urban areas for each state.

Inflation booster in the state

Inflation data for June shows extensive variations between countries and between rural and urban segments. For example, in Assam, rural inflation exceeds urban inflation more than 2 percent, whereas in urban inflation Bihar exceeds rural inflation of more than 2 percent.

In Telangana (the state with the highest inflation rate in June), the component that shows the most steep price increase in June is ‘fuel and light’. This component includes electricity, LPG, kerosene, coal, charcoal etc. Inflation “fuel and light” as a whole in Telangana is 21 percent. Both rural and urban areas show an increase in this category. But its weight in CPI overall Telangana is 6.1 percent.

The main driving force for inflation in Telangana is the category of “food and beverage”. Food inflation recorded a growth of 11.6 percent in June. The price increase is clearer in the rural segment. The weight of “food and drink” in the CPI basket is more than 52 percent for rural areas. So, the increase in food prices in rural areas will reflect a higher overall inflation for the country.

Kerala inflation presents a contrasting picture. Inflation for the “food and beverage” category is 3.8 percent in June. Food inflation in Kerala has been below 5 percent since November 2020. One of the reasons that has been cited for the relatively lower food inflation rate in Kerala is a strong public distribution system (PDS). This has resulted in maintaining the price of important goods remaining controlled.

Tamil Nadu is also able to keep the price under control, despite the weight of ‘food and drinks’ in his rural CPI more than 52 percent. One of the possible reasons is that the state provides a number of items through its PDS.

In Kerala, inflation has mainly been driven by other ‘other’ categories. There has been a consistent increase in inflation in this category since the second half of 2021. This category includes health, transportation and communication, personal care, and other services. The price increase in this category shows the revival of the demand pressure by decreasing the COVID case.

In Haryana, while food inflation has experienced moderation in June, there has been an increase in prices of clothing and footwear. This increase was seen in rural and urban segments. Another component that has seen a sharp surge is the ‘other -other’ category.

The resurrection of core inflationary pressure

Clothing and Footwear’ is one of the categories that has seen a price surge in most countries over the past few months, as a result of the opening of the economy and the resurrection of hidden demand. This, along with several items and personal care services (in other ‘other -overall’ categories) has caused an increase in core inflation.

In the future, while lower food and commodity prices can reduce inflation in the state, reopening the service sector, transmission of input costs, and the resurrection of hidden demand can lead to challenges. Reserve Bank of India is likely to continue with monetary tightening and raising the level of policy repo in the monetary policy review next month.