Retail inflation instantly impacts the cost of fundamental goods and services like fuel, housing, food, and healthcare. Higher inflation deteriorates purchasing capacity, specifically for low- and middle-income families, as their real income (modified for inflation) drops. Notably, the year-on-year inflation rate for March 2025 lowered to 3.34%, a decline of 27 root points from February 2025, marking the lowest monthly inflation rate since August 2019.

This topic is related to the General Studies Paper III, which covers Easing inflation and related concerns, Fiscal Policy, Inclusive Growth, Monetary policy, and Inflation management etc. This comprehensive article will boost your preparation for each subject and to ease your UPSC journey join UPSC CSE Coaching today.

Download Daily Current Affairs for UPSC!

What is Retail Inflation?

Based on the consumer price index (CPI), retail inflation dropped to 5.22% in December 2024 from 5.48% in November 2024, caused by easing food inflation. Retail inflation calculates the rate at which the costs of goods and services customers buy over time, reflecting differences in the cost of living. The inflation rate in India was 4.83% as of April 2024, as per the Indian Ministry of Statistics and Schedule Performance. This means a fair decrease from the earlier figure of 5.69% for December 2023. CPI for January, February, and March 2024 are 5.10, 5.09, and 4.85, respectively. For all items, inflation rates in India are usually mentioned as modifications in the Consumer Price Index (CPI). Many growing countries use modifications in the consumer price index (CPI) as their primary measure of inflation. In India, CPI (merged) is the new benchmark for calculating inflation (April 2014). CPI numbers are commonly calculated monthly with a marked lag, making them unfit for authority use. India uses modifications in the CPI to calculate its rate of inflation. 

The WPI calculates the price of an expected basket of wholesale goods. In India, this basket comprises three groups: Primary Articles (22.62% of total weight), Manufactured Products (64.23%), and Fuel and Power (13.15%). Food Articles from the Primary Articles Group account for 15.26% of the real weight. The essential elements of the Manufactured Products Group are Food products (19.12%); Chemicals and Chemical products (12%); Basic Metals, Alloys, and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).

Get Free Materials for UPSC Preparation by Testbook!

What are the Concerns Related to Inflation?

Growing economies face many challenges, particularly in economic policy with the Central Bank, inflation, and the price equilibrium phenomenon. There has been a versatile statement these days when monetary policy is chosen to be a critical factor in defining and managing inflation. The Central Bank operates to maintain and have an unchanging price for items. A good environment of price stability occurs to start holding mobilization and sustained economic development. The former Governor of RBI, Rangarajan, implies a long-term trade-off between outcome and inflation. He adds that short-term trade-offs only present delays in the price level in the future. There is an understanding that the central banks have strived to raise the price stability target, while an argument supports it for what that implies in practice.

Inflation Beyond RBI's Target

Seven states registered inflation above RBI's 6% threshold, while ten states surpassed the national average. Chhattisgarh had the highest inflation at 7.63%, observed by Bihar (7.4%) and Odisha (7%), reflecting localized inflation challenges. 

Imported Inflation

Rupee devaluation raises the cost of imported crude oil and multinational commodities, growing household prices and making it more challenging to handle inflation. The dependence on imported items, such as edible oils, discloses India's global cost volatility. A weaker rupee makes imports more costly because more rupees are required to buy the same quantity of foreign items. 

Increased Global Interest Rates

Increased global interest rates could prevent foreign investment in India, affecting economic strength and declining money depreciation. It could lead investors to move capital to countries like Europe and the US, offering increased yields and easing foreign investment inflows into appearing markets like India.

Know more about the Consumer Price Index here!

The Consumer Price Index (CPI) estimates the moderate difference in consumer prices over time for a basket of consumer goods and services. The CPI calculates inflation as customers experience inflation in their day-to-day living costs. It defines all goods and services bought for consumption by the reference population. BLS has categorized all cost articles into more than 200 categories, organized into eight main groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. These main groups comprise government-charged user fees, such as water and sewerage charges, auto-enrollment fees, and vehicle tolls.

Goal

CPI targets price stability, modifies dearness allowance, and comprehends the cost of living, purchasing power, and goods and services. 

Calculation

CPI is estimated by splitting the cost of a fixed basket in the current year by the price in the base year, then multiplying by 100. 

Classifications

 4 different types of CPI were calculated. 

• CPI for Industrial Workers (CPI-IW): It follows price differences in a specified basket of goods and services used by industrial workers over time. The Labour Bureau, under the Ministry of Labour and Employment, compiles CPI-IW. 
• CPI for Agricultural Laborers (CPI-AL): The Labour Bureau compiles CPI-AL to help fix minimum wages for agricultural workers across various states. 
• CPI for Rural Labourer (CPI-RL): It calculates differences in the retail costs of goods and services consumed by agricultural and rural laborers. The Labour Bureau compiles CPI-RL. 
• CPI for Urban Non-Manual Employees (CPI-UNME): CPI-UNME is collected by NSO. An urban non-manual employee acquires 50% or more of their income from non-manual work in the urban non-agricultural sector. 

Elements

The following are the primary elements of CPI, along with their weightage. 

• Food and Beverage (45.86%) 
• Housing (10.07%) 
• Fuel and Light (6.84%) 
• Clothing and Footwear (6.53%) 
• Pan, tobacco, and intoxicants (2.38%) 
• Miscellaneous (28.32%)

Know more about the Agricultural Notes for UPSC here!

Download Retail Inflation Key Takeaways PDF

If you need detailed study materials for the UPSC CSE exam and for other competitive exams, Testbook is your ultimate solution. Their quality content covering MCQs with comprehensive explanations, master classes, practice papers, and mock test papers covering general studies and videos related to current affairs have secured their top position. Uplift your UPSC preparation by downloading the Testbook App today.