Retail inflation calculated based on the Consumer Price Index has hit 7 per cent for the month of August, rising from 6.71 per cent in July. The increase, which keeps inflation above RBI’s comfort level of 6 per cent for the eighth straight month, is driven by rising food prices on a global level.
What is CPI?
Consumer Price Index is the change in money spent by consumers on a specific basket of products for a certain period of time. The food basket for August was hit by an inflation of 7.62 per cent according to latest CPI data.
This means that your cereals, housing, clothes, vegetables and milk will be more expensive. The reason behind this is a poor monsoon in North India, which created a shortage of wheat and rice, forcing the government to ban their export leading to an inflation in food prices.
What does it mean for consumers and investors?
Beyond statistics, CPI data indicates the rise in everyday expenses for the common citizen having to shell out more for food, consumer goods and fuel, at regular intervals. For investors, rising inflation means lower consumer spending, leading to lower sales, which reflects on the performance of stocks. Stronger stocks may become undervalued due to long-term inflation, which can be an opportunity for investors to buy them at lower prices.
Inflation also prompts RBI to hike the repo rate, which means higher interest rates on loans and those offered to depositors. This is done in order to control liquidity, which means less cash in hand and less spending, eventually bringing down demand to reduce prices.