Since last December, the gulf has been widening which economists attribute to several factors, including the composition of the basket in both areas. The retail inflation data showed urban inflation soared 6.5% in March, while rural was at 4.6%. Since January last year up to December, rural and urban inflation were almost at similar levels and in some months rural inflation was a step ahead of urban.
“Food inflation, for example, tends to be lower in rural areas, especially for products which are witnessing increasing inflation. Pulses, for example, have lower inflation as the levels of intermediation are lower in rural than urban areas. These goods travel probably just one level, while this increases for urban areas where profit margins and costs get added,” said Madan Sabnavis, chief economist at Care Ratings.
He said fuel and light inflation remains lower in rural areas as there is lower consumption of products such as diesel and petrol and there is more use of firewood, where prices do not change significantly.
“For miscellaneous products, for example, recreation inflation is higher in urban areas because the facilities which can be a mall theatre, or a gym have high costs which are loaded to consumers. In rural areas, there are simpler modes of recreation where cost is lower as are local taxes, rents etc. Health inflation is lower as less recourse is taken to private facilities and people rely on free public services,” said Sabnavis, while explaining the reasons for the widening gap between the two inflation rates.
Former chief statistician Pronab Sen said the widening of the gap can be explained by the composition of the basket of items. “For the rural basket, food has a higher weightage, while for urban areas non-food items dominate,” said Sen and pointed to the sharp increase in core inflation (which is excluding food and fuel). Core inflation in March shot up to a 32-month high of 5.8%.
He also said that since it is not yet a fully integrated market, prices vary in different markets which have an impact.