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Inflation: The Impact On Common People
Inflation: The Impact On Common People
Both types are in many times interrelated, and both have negative effects
on the economy and individuals.
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EFFECTS OF INFLATION
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THE FLIP SIDE
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ECONOMIC FACTORS
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THE CONSEQUENCES
Inflation can create major problems in the economy. Price increase can
worsen the poverty affecting low income household.
Inflation creates economic uncertainty and is a dampener to the investment
climate slowing growth and finally it reduce savings and thereby consumption.
When the balance between supply and demand goes out of control,
consumers could change their buying habits, forcing manufacturers to cut
down production.
The producers would not be able to control the cost of raw material and labor
and hence the price of the final product. This could result in less profit or in
some extreme case no profit, forcing them out of business.
Manufacturers would not have an incentive to invest in new equipment and
new technology.
Uncertainty would force people to withdraw money from the bank and
convert it into product with long lasting value like gold, artifacts.
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MEASURE OF INFLATION
India uses the Wholesale Price Index (WPI) to calculate the inflation rate.
Most developed countries use the Consumer Price Index (CPI) to calculate
inflation as this actually measures the increase in price that a consumer will
ultimately have to pay for.
Presently 145 Countries practice CPI compared to 27 practicing WPI.
Latest statistics show that the prevailing annual rate of CPI inflation is 7.2 per
cent, while WPI inflation is about 5 per cent.
This implies that CPI inflation can be positive even when WPI is negative. 8
The common man is
least interested in
knowing either the
WPI/CPI or the
calculations thereof.
INFLATION AND THE COMMON PEOPLE
What he wants is
reasonable price and
not made to pay a
higher price for the
same item every next
time he goes to market.
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INFLATION: THE INDIAN SCENARIO
India after independence has had a more stable record with respect to
inflation than most other developing countries. Since 1950, the inflation in
Indian economy has been in single digits for most of the years
Between 1950-1960
The inflation on an average was at 2.00%
Between 1960-1970
The inflation on an average was at 7.2%
Between 1970-1980
The inflation on an average was at 8.5%.
Inflation At Present
Inflation is at a 30 year low. The inflation ended at a low of 0.61% in the
week ended May 9, 2009 this after reaching a 16 year high of 12.91 % in
August 2008.
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The Frustrating Fallacy
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Dipping Inflation Rising Prices
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It is normally understood that when inflation is low or in the negative
terrain, the prices are expected to decrease.
Inflation stood at -1.17 per cent for the week ending July 17.
However, the prices of commodities and food items were on the high.
This is because
The Wholesale Price Index (WPI) of food items is still above six per
cent.
Though inflation is in the negative, we continue to pay higher prices
for food grains as the country is majorly dependent on the seasonal
production of commodities.
The monsoon plays a crucial role in this. If rains are delayed or
scarce, then prices are bound to go up.
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Year Oil Price in India International Price
(Rs/lt) ($/Bl)
1973 0.83 14
1986 3.52 20
1990 5.62 29
1996 9.00 23
1999 12.00 19
2004* 24.35 38
From 1973 to now, an Indian pays 48 times for one litre of fuel.
The international price has just gone up 7.5 times.
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* Negligible Government Subsidy
* Government Subsidy of approx Rs. 1,50,000 crores.
Why is this difference?
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This anomaly can be attributed to exchange rate which in turn is
largely influenced by the Monitory Policy of the Govt.
India imports more than it exports, so a strong rupee would help the
country
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AN ILLUSTRATION
If Oil Price remains the same, but Rupee exchange rate becomes
Rs. 45/ US$, then a barrel of oil in India now costs Rs. 4,500/-
This leads to inflation in India, even when there is no inflation in the
world.
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A Foray into Forex
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Exchange Rate
It is the rate at which one currency is sold to buy another.
Fixed FX rate is the rate fixed by the central bank against major world
currencies like USD dollar.
Floating FX rate is the rate determined by market forces based on demand
and supply of a currency.
India had semi fixed rate model till the 90s
RBI Hiked CRR and Sold MSS Bonds to suck out Rupee Liquidity
totaling US$ 42 billion
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Misleading Myths
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Myth1:
It's all about food prices.
Fact:
Inflation stripped of food and energy, or other volatile components, is
still rising.
The WPI includes 435 commodities data apart from food.
Myth2:
A stronger rupee does nothing to control inflation
Fact:
A stronger rupee helps reduce inflation because it lowers the import
prices of oil, other raw materials and capital goods and this, in turn,
lowers the cost of production.
It also reduces the prices of import-competing goods, like steel.
A related myth is that a strong rupee will kill the economy by hurting
exporters. A stronger rupee does reduce the rupee value of export
earnings - but it also reduces the cost of imported inputs, and to the
extent that it dampens inflation, it limits the need for interest-rate hikes. 23
THE BOTTOM LINE
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