Tue Sep 12 07:00:00 CDT 2017

Actual Previous
Change Y/Y 3.36% 2.36%

India's consumer price index increased by 3.36 percent on the year in August, up from 2.36 percent in July and rebounding further from 1.54 percent in June, a record-low level since the CPI was introduced in 2012. This takes inflation closer to the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent.

Food prices were again the man factor driving the move in headline inflation. Food and beverage prices (around 54 percent of the index) increased by 1.96 percent on the year in August, up from 0.43 percent in July, with vegetable prices up 6.16 percent on the year in August after dropping by 3.57 percent in July. Housing prices also increased at a faster pace, up 5.58 percent on the year in August from 4.98 percent in July, though the year-on-year increase in fuel and light prices rose only slightly form 4.86 percent to 4.94 percent.

Inflation in urban areas rose from 2.17 percent in July to 3.35 percent in August, while inflation in rural areas accelerated from 2.41 percent to 3.30 percent.

Today's data are broadly in line with officials' expectations for price pressures to build in the near-term. Following the sharp drop in headline inflation in April. May and June, the RBI cut policy rates at its most recent policy review in early August, but also noted that much of the fall in inflation had been due to base effects and lower food prices which would both likely fade in coming months. The subsequent increases in headline inflation in July and August provide support for this view and suggest there is limited scope for another rate cut at the RBI's next policy review, scheduled for early October.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.