“Your monthly earnings are not working for you as much as they did before. Your earnings have to increase at least at the same rate of increase in the cost-of-living, which has not been the case for most individuals.”
Inflation is the decline of purchasing power of a given currency over a point of time. In other words, you get less for your money than you used to get. The topic of inflation is as much economics and business, as much as it is political; simply because each of us can feel the impact of inflation in our daily lives.
If a book cost you Rs 100 a year ago, and costs Rs 105 now, the inflation for the book is calculated as [(Rs 105 - Rs 100) / (Rs 100)] x 100, which in this case is 5 per cent.
Especially after two years of Covidimpacted economies, inflation continues to be an headache for policy makers and political leaders, globally. The country’s retail inflation, which is measured by the Consumer Price Index (CPI), is tracked by the National Statistical Office (NSO). Data released last week shows that the CPI rose to a seven-month high of 6.01 per cent in January 2022. For the RBI’s expectation that the inflation will average 5.7 per cent in the fourth quarter (January-March 2022), the CPI would now have to taper down considerably in the next two months.
The Government of India has mandated the Reserve Bank of India as its ‘inflation manager’, to maintain retail inflation at 4 per cent, with a margin of plus/ minus 2 per cent, for the five-year period ending March 2026. But then the range of CPI inflation (4 per cent, plus/minus 2 per cent) is not the only target that the RBI is concerned with. It also considers the ‘output gap’ or the gap between the actual GDP and potential GDP.
Inflationary pressures
The overall macroeconomic situation is in a recovery mode, but for many of us, growth is perceived to be concentrated at the top-end. There is worry that the lower and middle socio-economic spectrum could be stagnating. If there had been no supply chain issues, the growth rebound after the sharp fall in GDP during the pandemic would not have caused inflationary increase. In a sense, inflation is also a feature of economic recovery. As the Indian economy increases its pace of productive activities as estimated with Union Budget FY23 provisions, inflation could further increase.
Coincidentally, the RBI governor mentioned last week that “Today’s inflation print is expected to be around 6%. So that should not surprise or create any alarm, because we have taken that into consideration”.
The multiple Covid waves, lingering for over two years, have impacted supply chains across sectors, globally. This has added to the costs across supply chains and to inflationary trends. For example, we have seen how the global shortage of semi-conductor chips (for both pandemic and non-pandemic reasons) has hurt many sectors, including automobiles, consumer electronics, computing devices, amongst others.
The fear of continued impact due to the lingering Covid waves was impacting supply chains. This could stop hurting when the fear and panic around Covid reduces or stops, and economic activities start off without major Covid protocols, formally initiated by the authorities across the country.
The prices of petrol, diesel, cooking gas and edible oils are at an all time high. Despite the global crude prices increasing (currently upwards of US$ 90 per barrel), Indian oil majors have a soft-freeze on fuel prices currently, while the markets speculate that this is in view of the ongoing assembly elections where increasing inflation and unemployment issues could become a sore issue. This speculation is not without basis, as fuel retail companies had revised prices almost daily in the last calendar year. The prices of fuel and power have risen nearly 40 per cent between November 2020 and November 2021.
If crude oil prices continue to increase further, at some point of time soon, the oil marketing companies will be forced to increase retail prices (unless the government decreases the fuel taxes to help maintain retail pricing of oil). When economies get into recessionary modes and the prices fall, the demand for oil and metals increases; this increased demand could also increase prices again!
The other major inflation-attribute is the crop output. Low productivity and at times, even crop failures due to climatic conditions impacts food availability and consequently, the prices of pulses and edible oils, which lead up to ‘food inflation and CPI inflation’. Controlling these two numbers becomes a political necessity too. If we look at the December 2021 decision to ban agricultural futures trading contracts, it is a positive step. The official data indicates that food inflation rose again to 5.43 per cent in January 2022, from 4.05 per cent in December 2021. The contributor to this rise is the increase in price of milk products, vegetables, meat and fish and cereals.
Reducing our dependence on imports from other developed countries might reduce our inflationary pressure. In developed economies, labour costs have increased substantially in the past two years. This in turn contributes to an increase in the import costs of finished goods, as well as the imported input components for the Indian manufacturing sector.
If inflation remains higher than the 6 per cent mark, it risks the RBI missing its target. That might necessitate the RBI from making sharper policy adjustments to restrict inflation. At this point in time, the inflation manager is comfortable with the status quo.
Inflation-impact calculator - ‘Rule 72’ ‘Rule 72’ helps you understand inflation. It calculates the amount of time it would take for inflation to reduce the real value of your money to half of its current value.
Let’s say the present rate of inflation is 6 per cent. When you divide 72 by 6 per cent, the answer is 12 years. That is to say, if you have Rs one lakh in your kitty today, it would take 12 years for the value of your money to be halved!
(The writer is a corporate adviser and independent markets commentator. His Twitter handle is @ssmumbai)
