Why are the prices of daily necessities for the rich falling, while the poor struggle to buy essentials?

Inflation for certain “lifestyle” goods has cooled faster than inflation for essential goods, and rising income groups may not be feeling the pinch as much as those spending more of their income on groceries. It suggests.

According to the Lifestyle Inflation Index (LII) constructed by Bank of Baroda Research using data from the Ministry of Statistics’ Consumer Price Index (CPI), the lifestyle inflation rate in 2022-23 is expected to be 6.4%. , the headline CPI inflation rate was 6.7%. But so far in 2023-2024, lifestyle inflation has fallen to 4.5%, while headline inflation has averaged 5.4% in the first 10 months of this year.

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The LII was created using 69 of the 299 items in the Ministry of Statistics’ CPI basket, ranging from lifestyle foods such as cereals, chocolate, canned drinks, and Western liquor to suits, leather shoes, airfares, and airline tickets. This includes non-food items. Laptops, club fees, etc.

Bank of Baroda Economist Dipanwita Mazumdar said, “The index reflects the various taste choices of consumers within food, clothing and miscellaneous categories, especially for those looking to move up the consumption ladder. It reflects a style choice.” 16.

“What the analysis clearly reflects is that lifestyle inflation is accelerating due to demand factors reflecting rising aspirations. However, when comparing the lifestyle basket to the essentials, it happens that We see that there is a slight difference in inequality, with food price fluctuations leading to a higher inflationary burden for the latter compared to the former,” Mazumdar added.

Soaring food prices

It is no secret that food prices are high, and the central government has announced a number of measures in recent years to control prices, including a five-year extension of the free foodgrain scheme.

According to the Mazumdar Essentials Index (a measure of price changes for 22 food items for which the Ministry of Consumer Affairs collates data), the inflation rate for these essentials is 6%, and the inflation rate for lifestyle products in 2023-2024. has been shown to be significantly higher. . This is of particular concern in developing countries like India, where low-income people spend more of their income on necessities such as food.

Food constitutes 47% of the rural CPI basket and just under 30% of the urban CPI. According to the latest data, food retail inflation was 8.3% in January.

“As long as food inflation rises, the poor will continue to face the greatest burden,” CRISIL economists said in a Feb. 13 note.

Economists at CRISIL found that so far in 2023-2024, the urban poor face the highest inflation burden, with food prices rising by 7.5% in urban areas compared to 7.1% in rural areas. It is estimated that it is on the rise.

Rural food inflation was 7.91% in January, while urban food inflation was 9.02%, according to CPI data.

“On the other hand, the richest in urban areas are the least burdened as their consumption basket is largely comprised of non-food items,” CRISIL added.

Core inflation (inflation excluding food and fuel) fell to 3.6% in January, with CRISIL estimating 3.5% in urban areas and 3.7% in rural areas.

Changes in consumer behavior

Indeed, given that the current inflation series is quite outdated, conclusions about Indian consumers should be discounted from the CPI data.

The existing CPI inflation series is based on the 2011-2012 (July-June) Consumer Expenditure Survey (CES). The Ministry of Statistics launched a new study in August 2022 after the government controversially canceled the 2017-18 CES. Until that is finalized, policymakers are sticking with the current version, which includes items such as DVD players and audio cassettes. Now it’s as good as it is outdated.

CES is a survey of consumer spending patterns across the country. After it was reported in November 2019 that a draft survey report had found a decline in consumer spending, the government canceled the 2017-18 CES citing problems with the quality of the data. Survey junk has made it impossible to update India’s CPI inflation data, which is rooted in the 2011-2012 survey.

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Soumya Kanti Ghosh, chief economic advisor, State Bank of India Group, said current inflation data also does not take into account prices on e-commerce platforms, leading to “puzzling” line-item CPI data. It is said that there is a possibility.

Comparing item-specific data for January 2024 and April 2022, Ghosh found that the decline in the contribution to core inflation from the clothing and footwear and household goods and services categories in the CPI basket, such as sarees and shirts, found that this was due to a decline in the prices of items. , pants, soap etc. However, because these goods are used on a daily basis, it would be misleading to infer that the decline in core inflation due to lower prices for these goods is due to weaker demand.

“The only reason for this phenomenon could be the change in customer buying behavior. As people are actively using e-commerce websites to buy these essential items, preferably at discounted prices. , we believe that demand is shifting from offline to online,” Ghosh said.