DNA Explainer: Top factors leading to inflation in India

India is facing unprecedented inflation that means there is a general increase in prices of goods and services in the country. India's retail inflation surged to 7.79% in April, mostly due to rising fuel and food prices, government data released by the Ministry of Statistics and Programme Implementation showed on Thursday.

To explain it in simple words, the general price of goods for Indian consumers was almost 8% higher than it was in April last year. This is way above the Reserve Bank of India's upper tolerance limit for the fourth consecutive month. Inflation in food items was even more, a 8.38% in April, according to the MoSPI's Consumer Food Price Index.

Read | Costlier fuel, food push retail inflation to 8-year high of 7.79 percent in April

This is not only the highest rate in the last eight years but also almost twice the inflation rate targeted by the Reserve Bank of India. Since October 2016, the RBI is required to maintain retail inflation at a level of 4%. However, a leeway of two percentage points on either side is given. This means in a particular month, inflation can either fall as low as 2% or rise as much as 6%.

What is causing the price rise?

1. Crude oil prices

Crude oil prices were the biggest contributor to the rise in wholesale price index inflation in March 2022. But fuel is not the only factor driving inflation at the moment. The wholesale price-based inflation data released by the Commerce and Industry Ministry showed that crude oil prices were the biggest contributor to the rise in WPI inflation in March 2022, relative to February, followed by fuels and core items.

"The high rate of inflation in March, 2022 is primarily due to rise in prices of crude petroleum and natural gas, mineral oils, basic metals, etc owing to disruption in the global supply chain caused by the Russia-Ukraine conflict," the Commerce and Industry Ministry had said in a statement in March.

The rate of price rise in fuel and light category in the retail inflation basket quickened to 10.80% in April this year from 7.52% in the preceding month.

2. Russia Ukraine war

The war in Ukraine and the associated inflation through higher prices of crude oil are a significant contributor. The recent spike in inflation was due to rising prices of crude oil and other commodities due to disruption in the global supply chain in the wake of the Russia-Ukraine war.

But April’s high inflation data is neither unexpected nor a one-off spike. April's inflation is the seventh straight month when inflation rate has gone up. Inflation in India has, however, been above 6% since the start of 2022 which means before Russia's invasion of Ukraine happened on February 24 this year. 

3. Rising prices of essential food items

The retail inflation rose mainly on account of rising prices of essential food items like oils and fats, vegetables, meat and fish. CPI data shows inflation in oils and fats in March soared to 18.79%. This was due to the geopolitical crisis resulting from Russia-Ukraine war which has pushed edible oil prices higher.

Ukraine is a major exporter of sunflower oil. and India imports a major portion of the commodity from the war-ravaged country. Besides this, Ukraine is also a key supplier of fertiliser to India. In vegetables, inflation quickened to 11.64% in March, while in meat and fish the rate of price rise stood at 9.63% compared to February 2022.

4. Covid-19 pandemic

In 2020-21, when the pandemic hit the economy, food prices rose by an even larger factor 7.3% and even core inflation rose by 5.5%. But until then, fuel price inflation was still low at 1.3% in 2019-20 and 2.7% in 2020-21. In 2021-22, the year when the global economy started recovering sharply, even though food price inflation moderated to 4%, fuel prices rose by 11.3% and core inflation went up to 6%.