The recent rise in retail inflation has affected the lower strata of the population in the first nine months of the ongoing financial year, unlike FY22, according to estimates released by India Ratings and Research (Ind-Ra).

The effective inflation faced by the bottom 50% of the population both in rural and urban areas during April-December 2022 was 40 basis points higher than the headline retail inflation, the ratings agency says in a report.

The effective inflation faced by the bottom 50% of the population stood at 7.2% in the first nine months of FY23, the report says.

Ind-Ra's analysis reveals that a high inflationary episode driven by food and fuel erodes the purchasing power of poorest households more than well-off households. "This is in contrast to the scenario when inflation is driven by core items (which excludes food and fuel)," says Paras Jasrai, analyst at Ind-Ra.

Retail inflation does not affect all households in the same way because the consumption baskets of households belonging to different expenditure strata vary. In general, the share of food & beverages items in the consumption basket of households belonging to the lower expenditure class would be higher and vice versa. This also means that the effective inflation faced by these households would be higher than the headline inflation if it is driven by food items.

Retail inflation, measured by the Consumer Price Index (CPI), jumped to 6.52% in January 2023 from 5.72% in December 2022, breaching the Reserve Bank of India's (RBI) upper tolerance limit of 6%, shows government data. While urban inflation rose to 6% in January compared with 5.39% in the previous month, rural inflation soared to 6.85% last month from 6.05% in December 2022, according to data released by the Ministry of Statistics & Programme Implementation last week.

The strata-wise inflation estimation shows that while the urban poorest 5% experienced 7.4% inflation during 9MFY23, the rural poorest 5% faced 7.3% inflation, according to Ind-Ra. "Similarly, the urban richest 5% faced 6.7% inflation during 9MFY23, the rural richest 5% experienced 6.6% inflation."

This is not surprising because food & beverages account for 60.6% of the consumption basket of the poorest 5% in rural areas and 59.2% in urban areas, the report says.

The average inflation experienced by the top 50% of the population at 6.9% was lower than the 7.2% faced by the bottom 50% in rural areas in 9MFY23. At the same time in urban areas, the upper half of the population felt an inflation of 7% which was lower than that of 7.2% felt by the lower half.

The Reserve Bank of India (RBI) has forecast retail inflation at 6.5% for FY23 and at 5.3% for FY24.

Last month, India's chief economic adviser V Anantha Nageswaran said that inflation may not be as big a problem in the next financial year, as it was in 2022, even though uncertainties remain. Addressing the media on the Economic Survey 2022-23, Nageswaran said he expected inflation to remain well behaved in 2023-24 with upside risks.

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