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Analysis of Regional Factors

Disaggregate Food Inflation in India

Inflation may vary across space and commodities due to differences in region-specific or idiosyncratic factors such as climate, local culture, and the existing institutional set-up. These factors cause disaggregate, or regional, inflation, which in turn coalesces into aggregate inflation. Food inflation is a typical example. Spatial factors and rainfall are the most important determinants of disaggregate food inflation. Local inflation differs from aggregate inflation; the rate of inflation varies by city and commodity; and the determinants of rural and urban inflation are different. In addition to demand management policies, aggressive supply-side policies are the need of the hour.

Most central banks probably bank on the strong theoretical argument that local inflation is no different from national inflation (Clark 1984), but inflation varies across space and commodities due to differences in region-specific factors like climate, local culture, and the existing institutional set-up (Beck et al 2009). These idiosyncratic factors, in turn, depend on regional fiscal policy measures, market regulations, production structures, and trade patterns. These factors may influence either the demand for or supply of a commodity or of all commodities in a region and, thereby, the rate of inflation. A policy implemented at the aggregate level may impact regions differently, and cause price distortions (Deaton and Dupriez 2011), as the impact of different economic shocks differs by region (Pino et al 2016).

It is important to understand regional inflation. Central banks use the inflation forecast as the nominal anchor for monetary policy; disaggregate inflation is critical in forecasting headline inflation, at least in large countries like India (Deaton and Dupriez 2011). Analysing inflation by region and commodity may help to understand why inflation differs by region in a country; it may help also to discover the persistently inflationary disaggregate components of core inflation (Zaffaroni 2004). Regional convergence of inflation may not be possible, but knowing the extent of divergence is crucial in forecasting aggregate inflation.

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Updated On : 1st Mar, 2019

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