Why inflation rate is not the same as affordability

Why in the News?

India’s inflation has remained mostly under the RBI’s target range of 2-6%, showing success in controlling price rise. However, many people still feel daily expenses are high because prices have increased over the years faster than incomes for many families. This has raised an important question: Does low inflation really mean things are affordable?

Why is inflation different from affordability?

1. Different Meaning: Inflation measures the rise in prices, while affordability measures whether people can still buy goods and services comfortably.
2. Different Basis: Inflation focuses on price increase, whereas affordability depends on income growth relative to prices.
3. Lower Inflation ≠ Lower Prices: A fall in inflation means prices are rising slowly, not that prices have reduced.
4. Cumulative Effect: Affordability depends on the total increase in prices over time, not only yearly inflation.
5. Real Purchasing Power: Even with low inflation, affordability declines if wages and incomes do not rise adequately.

How has RBI succeeded in controlling inflation but not affordability concerns?

1. Inflation Targeting Framework: RBI adopted formal inflation targeting in 2016, aiming to maintain retail inflation at 4% ±2%.
2. Policy Success: Retail inflation remained largely within the 2-6% comfort band, except during exceptional shocks.
3. Monetary Tightening: RBI increased repo rates to curb inflationary pressures arising from excess demand.
4. Structural Limitation: Monetary policy controls the rate of price increase, not already elevated prices.
5. Persistent Cost Burden: Even with lower inflation, consumers continue paying higher prices accumulated over previous years.

Data Highlight:

1. General price level increased by around 75% between April 2014 and March 2026.
2. Prices rose by 41% between March 2019 and March 2026.

How have rising prices affected different categories of workers?

1. Salaried Workers: Experienced relatively better affordability as income growth outpaced inflation in several periods.
2. Self-Employed Workers: Faced weaker affordability due to slower and irregular income growth.
3. Casual Labourers: Remained most vulnerable because of lower absolute earnings despite wage increases.
4. PLFS Classification: Periodic Labour Force Survey (PLFS) divides workers into:
   1. Salaried workers
   2. Self-employed workers
   3. Casual labourers
5. Data (2017-18 to 2023-24):
   1. Casual Labour Income: Increased by 43%, yet average monthly earnings remained only around ₹13,590.
   2. Self-Employed Income: Reached around ₹14,861/month.
   3. Salaried Workers: Earned around ₹22,690/month, showing relatively higher resilience.

Why does cumulative inflation matter more than annual inflation?

1. Limited Picture of Annual Inflation: Shows price increase only compared to the previous year and may hide long-term cost burden.
2. Rising Cost of Living: Cumulative inflation reflects the total increase in prices over several years, giving a clearer picture of household expenses.
3. Real Affordability: Affordability depends on whether incomes grow faster than total price rise, not yearly inflation alone.
4. Consumer Experience: Households feel the effect of accumulated increase in food, rent, transport, health, and education costs.
5. Example from Article: If the price index was 100 in 2014 and rose to 175 by 2026, even moderate yearly inflation still results in much higher everyday costs.

Why is affordability becoming a major policy concern?

1. Consumption Slowdown: Weak purchasing power suppresses domestic demand.
2. Growth Challenge: Lower household spending affects sectors dependent on mass consumption.
3. Income Inequality: Divergence in wage growth widens economic disparities.
4. Employment Quality Issue: Income growth depends on availability of stable and productive jobs.
5. Policy Dilemma: Excessive inflation control through higher interest rates may further suppress investment and employment.

Can RBI alone solve the affordability challenge?

1. Monetary Policy Constraint: RBI can contain inflation but cannot directly raise incomes.
2. Fiscal Policy Role: Government intervention through wage support, social protection, and targeted subsidies improves affordability.
3. Employment Generation: Productive employment raises real wages sustainably.
4. Supply-Side Reforms: Better logistics, food supply chains, and productivity reduce cost pressures.
5. Welfare Measures: Public provisioning in health, education, and food reduces household expenditure burden.

Conclusion

Inflation management and affordability are not synonymous. While India has achieved relative success in maintaining inflation within RBI’s target range, household well-being ultimately depends on real purchasing power rather than inflation statistics alone. Sustainable affordability requires a combination of price stability, faster income growth, productive employment generation, and reduced cost burden on essential services.

PYQ Relevance

[UPSC 2024] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

Linkage: The PYQ tests understanding of inflation, RBI’s monetary policy, and limits of inflation control in improving economic outcomes. The article extends this debate by arguing that controlling inflation alone does not ensure affordability, as real income growth determines purchasing power.