Sunday, December 30, 2007

Inflation , a non-expert's view

Wholesale inflation and Consumer inflation
The government has its own measure of inflation. There is Wholesale Price Index. And then there is Consumer Price Index. All the newspapers and TV channels talk loudly about only Wholesale Price Index. To know the Consumer Price Index for any month is pretty difficult since it is tucked somewhere deep in the inside pages of the newspapers, away from the screaming headlines and the business TV channels hardly make a mention of it, as if inflation in items of consumption by households has no relevance. But for the common man, Consumer Price Index is what really counts. An honest practice would be to talk about both the figures when some one boasts of having contained inflation. My suspicion is that in India , inflation as measured by CPI is a good 2% higher than WPI.
Inflation same for every one ?
People who are curious about the impact of inflation on their money and life should go for an independent assessment of annual rate of inflation. The items in the CPI bag, prices of which are tracked by the Government may not be relevant to you at all. They may include tea but not coffee. But you are a coffee drinker. You eat rice during every meal and make faces at the sight of wheat. But to the extent that both rice and wheat are in the CPI bag, the real inflation for you is either higher or lower than CPI, depending on the rise in cost of rice and wheat. You are an orthodox and religious man; you turn away your face from the heap of tempting onions in the vegetable vendor's shop. But onion is an important measure of food inflation since for a majority of Indians a meal without onions is unthinkable. You get free transport from the company for commuting to the office. Your inflation is less than that of your neighbour whose BP shoots up every time Petrol Prices shoot up. It is another matter that every item or almost every item you buy for your consumption has some element of cost impacted by price rise of Petrol.
Maintain a broad record of prices
Do you care to note down either in your memory or in a scrap book the prices of important items of expenditure at different points of time? It would be a very interesting exercise. Petrol used to cost Rs.4.50 per litre in 1982. Now it is more than 10 times that price. But the taxi fares in Mumbai have not gone up by 10 times. It is a modest figure, about 4 times. Only if you compare with 1973 figures, the taxi fares have gone up by 8 to 10 times.
A simple vegetarian meal (Thali) in middle -class localities of Mumbai used to cost Rs.2.- in 1971 and Rs.5.- in 1988. Today it is Rs.35.- So, food inflation for those who eat out has been steeper during the last 15 years than during the earlier period.
What goes up does not come down, right?
Wrong. Even nominal prices of some items have come down. For example, color TV. Mobile Phones. Computers. The real prices ( after accounting for normal inflation) have come down for ceiling fans, refrigerators etc. There is a pattern. Manufactured goods can beat inflationary trend and could cost less or proportionately less than before, if advancements in technology of production and improvement in productivity take place rapidly. Also, level of competition helps to keep a thumb on inflation. With market economy holding sway over the entire world, price movements can not be entirely in one direction.

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