The story of inflation - who pays the price

The various colours of inflation, and how it impacts different consumer groups.

The story of inflation - who pays the price

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• Pandemic and inflation: When the Covid pandemic started sweeping across one country after another in 2020, a concern among policymakers was to save lives and ensure that the likely economic recession does not become a prolonged one. Reviving economic growth and containing the spread of the pandemic were the only two concerns.
• Demand and supply: In the months starting June 2021, policymakers have watched the rise and rise of inflation as a major challenge. On one hand, most economies managed to bounce back within a few quarters. Some even have some growth worries at the moment. But the steady increase in prices is a story born out of a wide mismatch between supply bottlenecks and unexpectedly fast demand recovery. In short, there's demand, but little supply.
• Who got hit: The urban poor were worst affected by inflation since the start of the pandemic. Over the coming year, even the rich might feel the heat of high prices. October’s data in the US showed the highest inflation rate (on a year on year basis) in over three decades.

1. It's not just about the US, but many other countries are struggling with high inflation as well. Germany is experiencing inflation at 4.5%, Russia over 7%, Brazil at 10%, Turkey at 20%, and Argentina at over 50%.
2. Globally, the term “stagflation”, popular in the 1960s and the 70s, has made a comeback. It means a phase when a country’s economic growth is “stag”nant and while it also suffers from persistent high in”flation”. So stag + flation = stagflation.

• Disagree: Some experts say that the 1970s are a long way away from such predictions. Why? Scenarios of slowing growth and rising inflation clash with our global forecasts of the opposite.
• The Indian situation: India may not be staring at stagflation but it has its own set of worries on the inflation front. In recent months, the headline retail inflation (measured by the Consumer Price Index CPI) has been within the RBI’s comfort zone.

1. But there are reasons why Indians are likely to face sustained inflationary pressures not just for the next 6 months, until the end of the current financial year, but also in the next financial year (2022-23).
2. High inflation predates the start of the pandemic in India. Data shows that retail inflation was above or near the RBI’s comfort zone since late 2019. These price pressures continued to stay elevated during the pandemic despite a complete collapse of demand.
3. This happened with high inflation in food and fuel prices. Inflation in food and/or fuel prices is seen as a temporary phenomenon as these price movements are often affected by short-term or seasonal factors, making their prices fluctuate wildly.
4. So, they go up for short-term reasons and then fall just as fast. Unseasonal rains during late October and early November tend to spike vegetable prices — as one annually notices with prices of onion and tomatoes.
5. But if these prices stay up for long, they do tend to seep through to what is called the “core” inflation.

• Core of it: Core inflation is a measure of retail inflation that ignores inflation in food and fuel prices. Using core inflation provides policymakers and economists with a more robust measure of inflation — that is, a measure that is seen to be more reliable. Today, core inflation is now higher than headline inflation. Why is that so?

1. A reason for high headline inflation in India was the high inflation in food prices.
2. Food articles account for the biggest chunk of headline inflation. But, over the past few months, food price inflation has simmered down. This brought down the headline number but core inflation has continued to be high.
3. The problem with core inflation is that it is often quite sticky, and tends to stay the way it is. Today, it is close to 6% and unless international crude prices come off sharply, core goods inflation may stay elevated. Core inflation (especially for services) may also pick up as economic reopening gains traction. (average 6% in Nov-Mar, and average ~5.5% next fiscal)

• Who is hit by all this: Clearly, the same level of inflation affects different sections of India differently, if seen through the CPI inflation across different income classes.

1. Both during the last financial year and in the first half of the current one, it is the urban poor (bottom 20% in the income category) that faced the highest inflation rate. So the urban poor were worse off than the rural poor.
2. Since the start of April, different components of inflation have behaved differently. Food prices inflation has come down sharply, fuel inflation has soared while core inflation has stayed high and sticky. If this persists, how will the different sections of society be affected?
3. In rural areas, it is seen that people belonging to the bottom 20% income bracket must be enjoying some relief because the biggest category they spend on — food and beverage (which accounts for over 60% of their total consumption) — has just a 3.5% inflation rate. But the rich, who spend 48% of their total consumption on goods and services that are neither food nor fuel, will face a tougher time since core inflation is 6.6% and likely to stay high for a little while.
4. In urban areas, it is the fuel price inflation that has been soaring at almost 15%. The worst affected is the poor, who spend almost 11% of their income on buying fuel.

• Summary: Overall, in an era of medical emergencies and shrinking formal-sector livelihood opportunities, it is important to see how people's lives get affected by rising prices. A steady decline in living standards begins affecting daily decisions, and reduces confidence about the future. Government policies ought to rebuild that confidence through targeted action.
• EXAM QUESTIONS: (1) Explain the difference between inflation measured by CPI and by WPI yardsticks. Which one is more realistic? (2) What are the ways rural and urban consumers behave differently? How do they experience inflation differently? Explain.

Read more on - Polity | Economy | Schemes | S&T | Environment

#Inflation #CPI #WPI #Rural #Urban

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.