June 04, 2023

Let’s Not Misread Recent Fall in Inflation

Sanjay Roy

THIS is indeed good news that the combined general consumer price index (CPI) declined for the fourth consecutive month from January 2023 to April 2023. In rural areas the successive decline in inflation as per the general CPI is also recorded for the past four months and in case of urban areas, the decline in inflation is for the third consecutive month.

Inflation figures measure the change in prices on a month on month or year on year basis reflecting the rise in prices with reference to previous time point. A decline in inflation therefore does not indicate a fall in prices but a falling rate in the rise of prices. The general CPI fell by 96 basis points from 5.66 per cent in March 2023 to 4.7 per cent in April 2023. In rural areas compared to the previous month, the fall was by 83 basis points and in urban areas it was even more in the last month by 104 basis points. The biggest fall obviously was recorded on indices of ‘fuel and light’ and the inflation actually didn’t fall in cases of items like ‘pan, tobacco and intoxicants’.

The whole sale price index for all commodities taken together actually marks a deflation in April 2023 and deflation is also recorded in cases of non-food articles within the primary product group, mineral oils and for manufactured goods. All these indicate a falling tendency in the rise in prices and this is primarily because of the base effect as prices increased significantly in the last year due to supply bottlenecks driven by the pandemic and the war. The important point however is that the fall in inflation rate comparing with figures of previous months should not actually overshadow the massive loss in real income of the working people in the past three-four years.


Let us now consider the index numbers of consumer price index which tells us the change in prices over a longer time span. The general index of the prices of goods (CPI) which has been 137.80 in May 2018 increased to 178.10 in April 2023. For food and beverages, the price index has increased from 136.4 in May 2018 to 182.2 in April 2023. True that the composite general index has increased from 177.2 in March 2023 to 178.1 in April 2023 which is a marginal rise and the lowest increase in the past 18 months but that does not mean that the massive burden on the people due to rise in prices over the past five years has actually eased out. More importantly for some items particularly whole cereals, wheat related products such as atta and maida, bread or cereal substitutes, the inflation rate continues to be 13.67, 15.46, 17.09, 11.39 and 18.73 respectively.

Prices usually increase either because of excess demand in the market or because of rise in the cost of production. Poor people of our country lost their purchasing power heavily due to loss of earnings as a combined effect of demonetisation, introduction of GST and unplanned execution of lockdown. The dampening of demand because of the loss of income was repeatedly expressed in successive consumer confidence surveys conducted by the RBI. Hence the rise in prices was not driven by excess demand but it meant actually a state of stagflation when the growth slowed down but prices spiralled high during the financial year 2022-23. The monetary policy of the central banks world over including India increased the repo rate successively as a result of which deposit and lending rates in commercial banks increased which increased the cost of credit. The idea behind such policy stance is to restrict immediate purchase, make savings lucrative and reduce credit driven purchase. Credit money however takes various forms and is not necessarily limited to the supply of currencies. But such policies lead to further contraction of demand as the cost of EMI increases and due to the increased burden of debt repayment the share of disposable income available for other consumption expenditure also shrinks. The effect of monetary tightening has already been seen in many countries by the fall in housing demand.

Inflation has been primarily driven by supply side factors, rising commodity and energy prices, those once normalised has eased out inflation. The burden of rise in prices had always been shared on the basis of relative position in the ongoing class conflict. If prices increase and the workers were able to achieve higher wages in response to the rise in prices, then part of the burden on the working class would have got displaced. But if the workers are not able to collectively bargain against capital, then the burden of higher prices could be completely shifted to the working people. In the case of India, more than 90 per cent of the workers are unprotected from market related risks. Hardly any institutional mechanism for collective bargain exists for the vast majority of the working people and since in many cases producers enjoy monopoly power over the market, the larger part of the burden got shifted to the common mass.


In a country where the vast majority of the people do not have any institutional mode of ensuring inflation indexed income, inflation causes erosion of real income. Even in the organised sector, protecting income in the face of high inflation is becoming increasingly difficult due to the ascendancy of capital in general with the aid of the neoliberal State. Hence inflation causes erosion of income for the larger section of the working people. But working people do exercise some power of negotiation using perceived degree of social sanction and ascertain rise in wages which most of the time fails to keep pace with the rising inflation. If the growth of prices or the rate of inflation happens to be higher than the growth of nominal wages, then real income actually falls even if nominal wages increase.

In the recent past if we consider a period say April 2018 to March 2023 and see the monthly inflation figures and the change in wages in rural India, the figures suggest that in the past 60 months, inflation rate was higher than the change in wage rate for 32 months. It is not only the number of months that is important but even more is the length of the period where people faced successive decline in purchasing power. There were three big episodes during the past 60 months when the rise in wages fell short of the rise in prices in rural India and these are: September 2019 to October 2020 that is 14 months; April 2021 to July 2021 (4 months) and December 2021 to September 2022 (10 months). The length of the stretch and the extent of the gap is important because if the gap between the changes in income falls short of the change in prices, the cumulative erosion of purchasing power increases and this causes rising indebtedness. This is the reason why even if the inflation rate falls now, the restoration of the purchasing power that people had before the long stretch of inflation takes a longer time. If we take the average increase in wages in rural India in the past 60 months, it falls short of the average of inflation rate during this period. Therefore, there had been an erosion of purchasing power with increased intensity in the three periods mentioned above and the erosion of income is being further accentuated as it is being carried over in successive months. This also explains the fact of slow recovery of consumption expenditure growth in India which falls once again due to waning of the pent up demand that accumulated during the pandemic. But inflation on the other hand helped corporates to increase their profits as prices increased while the wages not being raised at that pace, actually inflated the profits of the corporates.