Explained: What the two sides of inflation tell us about the economy

Vivek Kaul
So there is yet another inflation piece that I need to write,” he said, in a rather disappointed tone.
“Oh, but didn’t you just write one a few days back,” she replied. “And I was so looking forward to spending the afternoon at Phoenix Mills.”
“Ah. Safes me the trouble,” he said. “And for once I don’t have to eat that fancy, expensive and bland pasta in white sauce, that you make me eat.”
“But how come you need to write something on inflation so soon?” she asked ignoring the pasta jibe. “Didn’t you write one on Friday?
“Yes I did. But that was a piece around consumer price inflation (CPI). Today the wholesale price inflation number has come out.”
“Oh,” she said. “And how bad is it?”
“The wholesale price inflation(WPI) number for November 2013 came in at 7.52%. In comparison the number was at 7% in October 2013. Interestingly, the WPI number for September 2013 was revised to 7.05%, from the earlier 6.46%.”
“And what does that tell us?”
“What that tells us is that the WPI numbers after September are also likely to be revised upwards,”he said.
“Hmmm. So inflation might be more than what we are being told right now?”
“Yes. Also, the food inflation was at 19.93%. Within it, onion prices rose by 190.3% and vegetable prices rose by 95.3$. Interestingly, the onion prices have fallen by 5.1% between October and November 2013. But potato prices have risen by 30.8% in the same period.”
“Yeah. I bought both onions and potatoes recently and realised that.”
“But food inflation at nearly 20% is what is making the scenario difficult for most people. Half of the expenditure of an average Indian household in India is on food. In case of the poor it is 60%. Over the last few years the government has gone on a spending spree in rural India, in the hope of tackling poverty. It has led to wages in rural India going up by 15% per year, over the last five years.”
“But isn’t that good?”
“Well, not in an environment where food prices are going up by 20%. You must remember that half of the expenditure of an average Indian family is on food.”
“And that is having other economic repercussions?” she asked.
“Yes. When people spend significantly more money on food, they are likely to cut down on other expenditure. And this also reflects in inflation data.”
“Manufactured products form a little under 65% of the wholesale price inflation index. The inflation in case of manufactured products stands at 2.64%. So inflation is primarily being driven by food articles. The other big contributors to inflation have been cooking gas and diesel, which have risen by 10.9% and 15.7% respectively.”
“Oh, is that really the case. I did not know that,” she replied. “But why are the prices of manufactured products not going up as fast as of the food articles and fuel?”
“I think I have already explained that to you.”
“Yes. When people are spending more and more money on buying food. They are likely to be left with less money to buy everything else. In this scenario they are likely to cut down on other expenditure.”
“Other expenditure?”
“It could be anything. From buying consumer durables to cars to everything without which one can do without in the immediate future.”
“And this has an impact on businesses?” she asked.
“Yes. When the demand is not going up, businesses are not in a position to increase prices. And that is reflected in the manufacturing products inflation of just 2.64%. It was at
5.41% in November 2012.
“Yes, what this really means is that business growth is slowing down and this in turn will be reflected in slow economic growth as well.”
“Hmmm. Thanks for explaining this to me.”
“My pleasure.”
“So why don’t you finish writing this and then we will go increase the other expenditure.”
“You mean pasta in white sauce?” he asked.
“Yes. Remember we are doing this for the nation.”
The article originally appeared on www.firstpost.com on December 16, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)