INFLATION

 During World War II

Cost of Car: ………..
Cost of House: ………
 What causes inflation? How does it affect your
standard of living?
 Inflation is defined as a sustained increase in the
general level of prices for goods and services.
 It is measured as an annual percentage increase.
 As inflation rises, every rupee you own buys a
smaller percentage of a good or service.
 There are several variations on inflation: -

- Deflation
- Hyperinflation
- Stagflation
Causes of Inflation

- Demand-Pull Inflation
- Cost-Push Inflation

 So is inflation evil ?
Ans: Not Necessary

Problems arise when there is unanticipated inflation:

- Creditors lose and debtors gain
- Uncertainty about what will happen next
- Decline in purchasing power
- Domestic products become less competitive
HOW IS INFLATION MEASURED?
1. Consumer Price Index (CPI)
2. Producer Price Index (PPI)
 Consumer Price Index (CPI)
 (CPI) is the benchmark inflation guide.
 It uses a "basket of goods" approach that aims to compare a
consistent base of products from year to year, focusing on
products that are bought and used by consumers on a daily basis.
 There are two presented CPI figures,
1. CPI for Urban Wage Earners and Clerical Workers
(CPI-W),
2. CPI for all Urban Consumers (CPI-U).
 National Urban Consumer Price Index
(1995/96 = 100)
MID-AUGUST 2007 (SRAWAN 2064)

Weig 2007/
  2005/06 2006/07   Percentage Change
ht 08P

Jul/A June/Jul Jul/Au May/Jun June/Jul Jul/Au Column Column Column Column
Groups & sub-groups %
ug y g e y g 5 5 8 8

1 2 3 4 5 6 7 8 Over 3 Over 4 Over 5 Over 7

   

100.0
1. OVERALL INDEX 170.7 180.6 183.1 187.6 189.8 194.7 7.3 1.4 6.3 2.6
0

   

1.1. FOOD & BEVERAGES 53.20 165.0 172.9 175.0 180.8 184.8 191.9 6.1 1.2 9.7 3.8

   

Grains and Cereal Products 18.00 158.8 170.1 170.5 178.5 180.8 184.1 7.4 0.2 8.0 1.8

(14.1
Rice and Rice Products 158.9 166.7 167.1 172.0 175.1 178.8 5.2 0.2 7.0 2.1
6)

Pulses 2.73 137.1 171.2 169.5 185.8 189.2 197.0 23.6 -1.0 16.2 4.1

Vegetables and Fruits 7.89 166.7 160.9 173.8 164.0 182.4 214.1 4.3 8.0 23.2 17.4

Spices 1.85 145.9 159.9 161.2 190.4 187.8 191.3 10.5 0.8 18.7 1.9
Strengths:
 Gives most insight into future Fed rate moves.
 Highly watched and analyzed in the media.
 Good regional and industry breakdowns for investor research.

 Weaknesses:
 Volatile month to month
 Fixed CPI has certain biases (new product, substitution),
which can distort results
 Exclusion of food and energy is only good for so long - these
costs should be considered when assessing inflation.
 The CPI is used to make adjustments to many
cash flow mechanisms.
 Used to estimate the total return on
investment.
 Report of CPI will often move equity and
fixed-income markets.
 Best known measure for determining cost of
living changes
 Producer Price Index (PPI)
 It is ‘Weighted index of prices measured at the wholesale, or producer level.’
 Shows trends within the wholesale markets.
 All of the physical goods-producing industries that make up the economy are
included, but imports are not.
 The PPI release has three headline index figures:
1. PPI Commodity Index (crude) e.g. commodities such as coal, crude oil
and the steel scrap etc
2. PPI Stage of Processing (SOP) Index (intermediate) e.g. lumber, steel
etc
3. PPI Industry Index (finished)
 The core PPI figure is the main attraction, which is: -
Finished goods index minus the food and energy components.
 The PPI does not represent prices at the consumer level.
Strengths:
 Most accurate indicator of future CPI.
 Good breakdowns for investors in the companies surveyed (mining,
commodity info, some services sectors)
 Can move the markets positively
 Data is presented with and without seasonal adjustment

Weaknesses:
 Volatile elements, such as energy and food, can skew the data.
 Not all industries in the economy are covered.
Use for Investors
 Very useful for investors in the industries covered in terms of analyzing
potential sales and earnings trends.
 Ability to predict the CPI.
 Many services-based industries have been brought into the index over time
such air, freight etc.
 THE 1997-98 ASIAN FINANCIAL CRISIS
 Until 1997, Asia attracted almost half of the
total capital inflow to developing countries

 Economies of Southeast Asia maintained high

interest rates, attractive to foreign investors looking for
a high rate of return

 Received a large inflow of money and experienced a

dramatic run-up in asset prices

 At the same time, the regional economies of Thailand,

Malaysia, Indonesia, the Philippines, Singapore, and
South Korea experienced high growth rates, 8-12%
GDP, in the late 1980s and early 1990s.
 IMF and World Bank, accalaimed it as "
Asian economic miracle"

 In 1994, noted economist Paul Krugman published an

article attacking the idea of an "Asian economic miracle"

 Argued that only growth in total factor productivity

(which was increasing marginally only), and not capital
investment (which was prevailing), could lead to long-
term prosperity

 His views were seen as prescient after the financial crisis

had become full-blown
 In mid - 1990s, Thailand, Indonesia and South Korea
had large external borrowing which led to excessive
exposure to foreign exchange risk in both the financial
and corporate sectors

 U.S. economy recovered from a recession in the early

1990s

 U.S. became more attractive investment destination

relative to Southeast Asia

 This attracted hot money flows through high short-term

interest rates, and raised the value of the U.S. dollar, to
which many Southeast Asian nations' currencies were
pegged, thus making their exports less competitive
 Large quantities of credit encouraged economic climate,
and pushed up asset prices to an unsustainable level

 These asset prices eventually began to collapse, causing

individuals and companies to default on debt obligations.

 The resulting panic among lenders led to a large

withdrawal of credit from the crisis countries, causing a
credit crunch and further bankruptcies.

 The exchange market was flooded with the currencies of

the crisis countries, putting depreciative pressure on their
exchange rates. In order to prevent a collapse of the
currency values, these countries' governments were
forced to raise domestic interest rates to high levels
 And higher interest rates caused more bankruptcies and further
deepen the crisis.

 The per capita income (measured by purchasing power parity) in

Thailand declined from $8,800 to $8,300 between 1997 and
2005; in Indonesia it declined from $4,600 to $3,700; in
Malaysia it declined from $11,100 to $10,400. Over the same
period, world per capita income rose from $6,500 to $9,300

 IMF was forced to initiate a $40 billion program to stabilize the

currencies of South Korea, Thailand, and Indonesia, as
government backed loan

 On Feb 2, The sense of crisis in Asia ebbs. Stock markets

continue recovery.
 Indian Inflation
 Inflation comes in many varieties, of which food-led
inflation is the worst, from the viewpoint of
government

 Newspaper reports suggest that in some cities the

consumer price of rice is up 20%, edible oils 40%,
dairy products 12% and some pulses 20%

 Government has already banned export of wheat last

year, has now banned the export of maize and pulses
and has raised the minimum export price of rice to
$1000/tonne. Import duties on edible oil and grain
have been abolished.
 Government's focus has suddenly shifted from
protecting Indian farmers against cheap imports to
protecting consumer by cheapening imports

 The prices are not soaring up due to drought or due to

fall in production

 The problem is that world prices have skyrocketed.

And the internet savvy farmers exactly know the food
prices in Chicago and London, and adjust their own
actions accordingly.

 Many farmers, especially the bigger ones, will hold

back their crop during the coming procurement season,
hoping to sell at much higher prices in later months
 In consequence the world price of rice in the last six
months has shot up 60%, wheat by 40%, and soybean
oil by 40%

 As the world demand pushed exporting countries

domestic prices to alarming levels, exporting
governments began imposing curbs on exports to tame
local prices

 Ukraine, Kazakhstan. Argentina, Russia, India,

Vietnam, Indonesia, and Cambodia have curbed rice,
wheat, oils exports so did Thailand
 The lesson is clear; curbing exports is a form of
national hoarding. If every country tries to hoard food,
food prices will naturally rise. And when government
starts to hoard food out of panic, the panic itself stokes
further inflationary tears, and these results in failure of
Indian government's anti-inflation package

 Inflation will come down only when world food

production rises (not only India’s), and world prices
fall. That can't happen immediately

 Today’s high price will induce farmers to grow more

and this could cool prices by early 2009 – the time for
next election. And the government can save their bacon
rather than anti-inflationary package
 Fluctuation of Retail Price in Kathmandu
Valley in last few months (From Survey)
S.N Items Current Price Old Price % Change
(NRs.) (NRs.)
1 Rice per kg. 36 31 16.13%
2 Soybean oil per 125 75 66.67%
ltr.
3 Pulse 90 88 2.27%
4 Cooking Gas 1100 900 22.22%
5 Kerosene
6 Petrol 80 73 9.59%
7 Diesel
8 Milk 15 14 7.14%
9 Wheat 70 64 9.38%
Floor Discussion?