High CPI number may hurt consumption

Inflation is a general rise in the price of goods and services over a period of time. Moderate inflation is good for the economy as it helps incentivise the producers of goods to produce and sell more , thereby increasing the goods supply and generates employment. However, high inflation can pose a trouble as it deters consumers from buying. This postponement of consumption results in the reduced sales of the companies and might even result in the eventual slowdown of the economy.

Most central banks around the world have a mechanism to keep inflation to a level that they think is optimal for their respective economy. India too has such mechanism with RBI monitoring inflation levels and taking measures for controlling it.

Recently, the number for Consumer Price Index (CPI) was released. Retail inflation in India rose to the highest since May 2014. CPI inflation stood at 7.59 per cent in January 2020, as compared to 7.35 per cent in December 2019, according to the data released by Ministry of Statistics and Program Implementation (MoSPI) on Wednesday.

High inflation at the time of fragile economic growth has prompted India’s Monetary Policy Committee (MPC) to keep the interest rates unchanged, even as Reserve Bank of India (RBI) continues to try and push up credit flow to support the economy. The monetary policy committee has a mandate to keep the inflation in the range of two to six per cent. Such high inflation may cause a hold on discretionary buying and lead to an eventual slowdown in the coming quarters.