Rural inflation continues to outpace urban inflation, a trend seen since January 2015. One of the key reasons for this is the higher weight of food products in the rural Consumer Price Index (CPI) basket. Food and beverages carry a weight of 54.18% for rural areas and 36.29% for urban areas. From the beginning of this calender year, food price inflation in rural India has remained elevated compared with urban areas. But in June, contrary to the trend, food inflation in rural areas eased to 7.35% from 7.4% in May. On the other hand, food prices in urban areas quickened at a higher pace, to 7.55%.

What’s interesting, though, is that non-food inflation is higher in rural India. The data released by the Central Statistics Office shows that prices of clothing and footwear rose by 5.94% in rural India compared with 3.52% in urban India. Similarly, as the chart shows, inflation in the “miscellaneous category", which is a gauge of inflation in the services sector, including education and health, is also higher in rural areas. What’s more, prices of these items have remained higher in rural areas than urban areas for some time now.

Why this is happening is a bit of a puzzle. After all, what with the drought, depressed rural wages and minor increases in minimum support prices (MSPs), one would have expected demand to be depressed in rural India.

Rural fuel and light inflation stood at 4.4% last month versus 0.35% in urban India. This is to due differences in electricity tariff cycles and variations in cooking fuel used in rural and urban areas, explained Sujan Hajra, economist at Anand Rathi Financial Services Ltd explained. Some economists believe infrastructural and distributional bottlenecks may be the reason prices of non-food items in rural areas are high. That sounds plausible.

What are the implications of higher rural inflation? Axis Bank Ltd’s chief economist Saugata Bhattacharya points out that with rural inflation outpacing increases in MSPs, the incentives for the farm sector will be hit. There’s little doubt that higher inflation adds to rural distress.

Will the good monsoon help rural demand? It is likely to boost farm incomes which, in turn, will help rural demand. That could very well increase rural inflation in the services sector and in other non-food items.

And finally, there’s a lot of talk these days of an upward revision of the inflation target of the central bank. That would hurt rural consumers the most, for whom inflation has been well above 6% for the past three months.

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