Inflation and India

“India's Consumer price-based (CPI) inflation eased to 6.71 per cent in July on an annual basis…”

Oof. Those were a lot of terms to begin with. Before you say “Urgh, I have to Google these now?” hold on because we've got you covered.

Inflation simply means the purchasing power of each unit of currency has reduced. The 70g Maggi used to cost 12 Rupees. It’s 14 Rupees now. That’s inflation of 16.67%. And an inflation rate tells how much the price has increased over a specific period of time. Easy enough, right? Let’s see why this is a big deal.

Did you know that 1000 Rupees in 1960 corresponds to an amount of 78,048.50 Rupees at the beginning of 2022 due to inflation? These are crazy numbers.

How does inflation even occur though?

This phenomenon is usually categorized into 3 types based on how it happens:

1. Demand-pull inflation

2. Cost-push inflation

3. Built-in inflation

It’s demand-pull inflation when the supply is unable to satiate the demand coming in. Since there is a lot of demand, the sellers usually raise the prices. That was kind of self-explanatory. The next one, cost-push inflation takes place when the prices of raw materials rise so the end product will as an obvious result be priced higher. If the price of chicken skyrockets, you’ll probably have second thoughts about ordering that good biryani from your favourite restaurant on a weekend. (Haha, who am I kidding, nothing can beat the love for amazing biryani. Not even inflation :3).

The last one is a little tricky. It’s also called the wage-price spiral. When the cost of living rises due to demand-pull or cost-push inflation, workers and employees demand higher pay to keep up with the price hikes. And when the employers yield to an increase in wages, they will have to compensate for this by raising their products’ prices in order to maintain their profit margins. This leads to a vicious loop.

Interestingly, the world today is experiencing a mix of all these simultaneously.

Traditionally it’s the people who save that are drastically hurt. The number of things your savings account could buy decreases over time. This is why the concept of investing is so important and it stems from the problem of inflation. But that’s the story for another Findojo. One way you can tackle this is by receiving an interest rate higher than the rate of inflation. If your bank is giving you a 6% interest rate and the inflation rate is 4%, your savings are getting a rise in value.

Before we move further ahead, we’ve to familiarise ourselves with a bunch of fancy finance-y words; the Wholesale Price Index or the WPI, tells you the change in the prices of goods before they are sold to consumers. As in, the prices charged by the manufacturer to sellers. Then, we have the Consumer Price Index or CPI, which you correctly guessed (Yay!). It’s a measure of the change in the prices of goods sold to consumers i.e. you. These are just ways to gauge price rises and in 2013, the CPI or retail inflation replaced WPI or wholesale inflation as a main measure of inflation.

Inflation over time is inevitable. But how do you know if the inflation rate is going beyond limits? Is there a maximum value? Well, a team of economists at the Reserve Bank of India and a former member of the Monetary Policy Committee (you really don’t need to worry about these names so much) did the math and economics for us. They concluded in a research paper last year that the “threshold inflation for India is at around 6 per cent.” Threshold inflation is the level of inflation beyond which it is detrimental to economic growth.

Inflation has been used more commonly than ever before in the media lately. But why is it so? The thing is, India has been witnessing the worst inflation rates for quite some time. In April of this year, the inflation rate was looming at a formidable rate of 7.79%. In July, it eased down to 6.71% but this is still freaking a lot of people out. You see, retail inflation making headlines consecutively for multiple straight months and dancing above the accepted tolerance level probably does not bring good news.

What are the factors driving inflation this year?

The fingers point to a lot of things. Firstly, the world still has not recovered from the COVID-19 wreckage of supply chains. An extreme increase in demand that was subdued due to the pandemic came pouring down at once.

Another major contributor is the Russian invasion of Ukraine. The war-hit country is the largest exporter of sunflower oil and we import a significant chunk of it. This meant a disruption in the supply and demand for a number of related commodities too. Since crude oil and natural gas prices jumped, as a result, more transportation costs were accumulated for consumer goods.

How and where else did we see the effects?

A major impact that is worth mentioning was on the stock market. The banks increased the interest rates to discourage people from borrowing and spending money. This is a common strategy during periods of high inflation. Consequently, the interest on debt instruments increased. This meant that people were retaining fewer profits from their revenues. Hence, investments reduced. Foreign investors in India pulled out massively this year. This meant a gloomy after-effect for myriad sectors.

Is there hope? Definitely. But the question is how soon the good part will come. Prices are still acutely pinching pockets but according to some professionals, the rates are on the decline. And by the end of mid-2023, the inflation rate is speculated to fall to a decent number.

At this point, we just need to wait and see what time unfolds.