Rural retail inflation higher than urban in 18 of the past 22 months

At a time when the central government has extended the free-food programme and rural demand has remained depressed, rural inflation was higher than its urban equivalent in 18 of the 22 months from January 2022 to October 2023.

The latest data released by the National Statistical Office (NSO) last week showed the consumer price index-based (CPI-based) rural retail inflation rate topped the urban inflation rate for the fourth consecutive month in October.

This comes after a brief interlude between March and June 2023, when the rural retail inflation rate was lower than the urban inflation rate. 

In October 2023, rural inflation stood at 5.12 per cent against urban inflation at 4.62 per cent.

The data shows high inflation in rural areas is being driven by food, primarily cereals. Although down from the peak levels seen earlier this year, inflation in cereal prices continues to remain in double digits (11.05 per cent) in rural areas as against 9.8 per cent in urban areas.

Paras Jasrai, senior economic analyst, India Ratings, said food prices had been driving rural inflation for the major part of the two-year period because of heat waves, the higher minimum support prices (MSP) for rice and wheat last year, and prices of vegetables rising this year.

“Given that the first advance estimates have painted a grim picture of production in major kharif crops along with the jolt expected in rabi sowing due to the low reservoir levels, food prices are expected to be hit further and keep rural inflation on the upside,” he added.

However, Bank of Baroda Chief Economist Madan Sabnavis said rural inflation tended to be disproportionately affected whenever there was a movement in the prices of food items because they were assigned a greater weighting while calculating inflation.

“Rural inflation is essentially food inflation. Housing has a weighting of nearly 22 per cent in the urban index but it is nil for rural areas. This weighting is distributed across other categories for rural inflation. Hence, food products have a weighting of approximately 54 per cent in rural versus almost 36 per cent in urban. So food prices end up determining rural inflation,” added Sabnavis.

Besides food inflation, core sector components like household goods, transportation, and recreation have also seen a greater price increase in rural areas than in urban areas since April this year.

Inflation in the services component stood at 4.6 per cent and 4.26 per cent in rural and urban areas, respectively, in October 2023.

“Apart from food prices, inflation in rural areas is often a result of supply-side constraints. Given that people in rural areas experienced a higher wage loss during the pandemic, demand has remained subdued, meaning that it’s basically the infrastructure and logistics costs that are keeping prices high in rural areas,” said Arun Kumar, former professor of economics, Jawaharlal Nehru University.

Echoing similar views, N R Bhanumurthy, vice-chancellor, BR Ambedkar School of Economics University, said along with food prices, the high pace of penetration of the formal market system in rural areas was leading to a price buildup for the past few years, and that was translating into higher inflation.

“A faster penetration of services like housing, restaurants, and processed food has led to a price buildup in rural areas, visible in the rural inflation indices, which are based on 2012 levels. Since urban areas are the centres of production for processed goods, transporting them to rural areas causes a further buildup in the prices, thus leading to higher prices there. So, even if wages are low and demand is suppressed, prices do not fall and continue to remain high,” Bhanumurthy said.