Showing posts with label Inflation. Show all posts

NoeL

Inflation is a measure of rise in general price levels of goods and services. Inflation is measured by taking a set (Consumer Price Index!) of goods and services, and then the prices of the items in the set are compared to prices one time period ago.

In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale prices. Inflation is primarily of two types - inflation due to cost push and inflation due to demand pull (supply side). Cost push inflation is due to rise in costs of input materials or labour, whereas demand pull inflation is due to increase in demand beyond installed capacity.

Controlled inflation is good for the economy as it increases motivation levels of people. The government, in consultation with the Reserve Bank of India, decides the inflation threshold in the country (current inflation threshold range in India is 4-5 per cent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies. Inflation went up quite a bit in the beginning of last year (around seven percent) on the back of high liquidity in the markets (huge funds inflows in the form of FII and FDI). The RBI controlled inflation by tightening the monetary policy (raising cash reserve ratio and interest rates) and letting the rupee appreciate against foreign currencies. Inflation came well within the control limits in the second half of last year. However, inflation is going up again this year from the last few weeks. Last week, it has gone above 7 percent. And this week it has peaked at 7.57percent. Highest in the last 4 years. The reasons of rising inflation this time are quite different from those last year.

Here are some of the main reasons behind rising inflation:

Price rise of essential commodities
The prices of the basic commodities - milk, vegetables, cereals, dairy products, cement, steel, edible oil etc - have gone up quite significantly, especially in the last few weeks. This is due to supply concerns. There is fear in the market that the supply of basic commodities is not increasing in proportion to population growth. This has triggered a wave of speculation in commodities and hence the prices are going up rapidly.

Commodity prices rise at global level
Rise in commodity prices at the global level is another factor that contributes to higher inflation in the country. The correction in global stock markets resulted in a rise of commodity prices all over the world as investors are using commodities, especially precious metals, to hedge their risk.

Rising oil prices
Crude oil prices have gone up significantly in the last few weeks. Although the government is controlling fuel prices in the country, rising crude oil prices plays a crucial role in general price rise.

Increasing demand
India's economy is growing at around 7-8 per cent per annum over the last few years. The per capita income levels have gone up and as a result, the demand for many commodities has increased significantly.

Basically, inflation does not have any direct relation to a fall or rise in the stock markets in the short term. However, when inflation goes up beyond the comfortable limit of the RBI and government, they take some strong policy measures such as tightening of monetary policies, regulatory controls, subsidy etc.

We can hear the word ‘inflation’ everywhere for the past 1 month or so… How many of us are aware of what it is? What are its implications?
I would like to explain what it is in the eyes of 6 different people… viz. House Broker, Politician, a Finance guy, RBI, Ruling Party and a Layman!

House Broker
For him, it is a good thing. He can now give away houses for rent at a much higher rate. Though he is not aware of what actually inflation is and what its effects are, he knows that the prices are increasing… which is for him, an increase in the rent… blessing in disguise!
Who suffers? The man, who is in need of a rented accommodation.

Politician
For him too, it is good thing. After all, he is having a social cause to make noise on and attract attention. This is his golden chance to establish himself and his party. Politician need not turn towards think tanks to come up with ideas like ‘some party’ in Mumbai did recently.
Blind followers of the party will call bandh or harthal and even not hesitate to call it ‘INTERNATIONAL’ when the whole thing will be confined to his neighborhood. Nothing comes out of it.
For the ruling party, it is a very bad thing. For the opposition, it is their golden chance to win the next election.
Who suffers? The man, who is paying a higher price to day-to-day essential goods, viz. rice, vegetables etc.

Finance Guy
This guy mostly will be a finance graduate from one of the premier institutes in India / Abroad. He will start analyzing the so called ‘inflation’ using his various tools… There is nothing much this guy can do… Also this guy is not worried much about it. Because, he is someone whose income has already touched the stars!!
Who suffers? Not him. Not his organization. But the common man who is not even aware of what inflation is and how does it look like…

RBI
This is the most difficult period for the people in RBI. They have to somehow control the inflation. They will start making changes to the monetary policy. (CRR, Repo, Reverse Repo rates!) They have to somehow bring the monster (inflation) down! Tighten the credit… Reduce the money that is being circulated in the market… etc etc..
Any change in monetary policy will take approximately 4-6months to show its effects.
Who suffers? The same common man…! Whom I prefer to call a layman…

Ruling Party
This is the worst thing that can happen to them! Not because they are worried about its effect on the common people. They are worried because, the opposition party or the politicians will make this the biggest weapon to use against them for the coming election. Sleepless nights ahead of them…
Ruling party will start amending its import – export policy. They will start campaign against hoarding. They will try to do whatever they can. After all, they have to win the next election…!!
Who suffers? Should I say who AGAIN??

Layman
For this poor guy, life becomes a burden. He have no idea what inflation is or how it can be controlled. What he knows is that, his daily expenditure is going above the roofs. He might even think of joining the politician (whom I described above) and his party, thinking that, it will help him bring down his expenses! But is never will! Because the politician is there for his own vested interests.

So that is inflation for each one of them!

NoeL