Friday, 31 December 2010

Inflation Skyrockets

Inflation is defined as "a rise in the general level of prices of goods and services in an economy over a period of time."  The never dwindling inflation in the Indian economy has reached a 10 week high despite hopes expressed by the economist PM and lawyer FM, along with helplessness conceded by other statutory bodies created to work on economic issues. The suspicion of hoarding expecting a price rise cannot be ruled out since this inflation does not fit into it's abstract economic definition.

The primary tool for controlling inflation is monetary policy, as widely believed. But, the money supply angle to ups and downs of inflation is fit only to the US economy as other economies have to ensure collateral gold to hold the value of money. The interest rate could not be a tool to control money circulation in India going by the behavioral trend, as Indians are not hell bent on spending with easily available money, but they are traditionally thrifty people, especially the female folk. So, the demand-supply influenced inflation is imagination unleashed to give an intellectual-look to the justification of a pathetic failure.

Well, we have a lot of issues to discuss come to talk of inflation. The calculation of inflation in India is done through debatable methods. In all developed nations inflation is calculated based on CPI (Consumer Price Index], but we do it based on the WPI [Wholesale Price Index]. This digs a gulf between the Government's numbers of inflation and the suffering the consumer has to undergo. Calculations based on wholesale price does not take into account the retail market price, so the inflation data maintained and quoted by the Government is far from reality.

But now, through any price index the inflation in India is super-hyper. But a matter of statistical pride is that the food inflation is still far below the level of 21.19 per cent seen during the same week last year.  Food articles contribute about 14 per cent in the wholesale price index.

The rate of price rise of vegetables was 29.26 per cent on an annual basis, while on a weekly basis, it was 4.58 per cent. Food inflation soared to a 10-week high of 14.44 per cent for the week ended December 18, 2010.
Fruits became 21.97 per cent more expensive, while milk grew 17.75 per cent costlier during the same week. A good monsoon and prospects of an abundant kharif harvest had prompted the government to exude confidence about a decline in food inflation, but things went haywire and the Government machinery was clueless as to why the prices keep soaring despite a Prime Ministerial hope.

High food inflation would prompt the Reserve Bank of India to hike key short-term rates at its policy review next month. But the demand-pull explanation of the might of monetary policy in keeping the inflation at the convenience of the common man would not work in India. The hike in interest rate or the reverse of it would not have an impact on the food prices unless the Government takes some essential politico-economic measures to check the inflation.

The F&O trade and the derivatives trade play a key role in fueling the skyrocketing of prices. The abolition of these trades, as vociferously demanded by Commies, is impossible given the technological advances in global commerce, but the Government could moderate that effectively to keep food prices safe from such artificial inflationary factors. Indian Railways has raised freight rate for iron ore, coal, sugar and a few other commodities by up to 4% which would contribute in keeping the inflation floating at the existing levels.

The insensitive decisions to export onions and other goods were cited as reason for the price hike, but reason has not been given by the Government for the consumer price being 50% higher than the current import rates. The Finance Minister states that the onion prices have been taken care of, but still the retail market price of onion is lower only to the sky in altitude. The FM also added that the fluctuation in milk, fruit, vegetables and certain commodities have contributed to the inflation, so are we to infer that the Government is taking up one product at a time in managing food inflation? Do we have a time frame to get the prices down to earth, Mr FM?

Upside risks to inflation are still high, says an RBI top person. This adds fuel to the fears of the common man flying high along with the prices. Politico-economic measures are needed now to bring inflation down, since we have reasons to believe that some politically connected vested interests are playing with the prices of food products. FM's estimates of year end inflation, however, is higher than 5.5 % indicated by Prime Minister earlier this month. He puts it at 6.5 %.

The FM today said that the rise was not because of the base effect, but effective measures to control inflation are also not seen in effect. "We are waiting for the full monthly figure. Weekly variations are there. Whether these are corrected in the coming week that is to be seen", says Pranab Mukherjee. This gives an impression that the Government views the inflation as a statistical issue and not a matter of humanitarian emergency, which further alienates the people manning the economic affairs from their subject matter, the people.

Sarcasm suggests that the nation might be better off with economists launching satellites and rocket scientists managing inflation! Have a happy 2011 folks, though!

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