The Scourge of Inflation in India

Reports released in the Indian media yesterday screamed that the headline inflation has reached an eight month high of 7%. But with ever increasing prices, soaring monthly expenses, spiralling cost of living, the inflation felt by the common man in India in much more than 7%.

http://timesofindia.indiatimes.com/business/india-business/Inflation-soars-to-8-month-high-of-7/articleshow/25750139.cms

Let’s first see what inflation is....Inflation is the year-on-year (Y-O-Y) or the month on month (M-O-M) increase in the prices of goods & services. Thus inflation is the change in the prices of goods 7 services in a country or an economy over a period of time. An inflation of 8% (Y-O-Y) means that a particular product which used to cost Rs. 100 in Nov 2012, now costs Rs. 108 in Nov 2013. In India, we have two inflation indexes, i.e. the Wholesale price Index (WPI) & the Consumer price Index (CPI). According to the current WPI, the inflation is 7%. This is because WPI is not a correct indicator of inflation as the index does not include many essential articles. The CPI or the consumer price index suggests something very different. According to the CPI, the inflation is more than 10%. Also there is food inflation data which suggests an 18% increase (y-O-Y). This means that the food articles which were available at Rs. 100 in Nov 2012 are now available at Rs. 118 in Nov 2013.

Now let’s see how it impacts the people..... Let’s assume the monthly income of an individual is in terms of percentage.i.e. 100% or 100 units. Earlier, this individual after deducting household expenses & other necessary monthly expenditure used to save 20% of his salary. Out of this 20%, a ten percent could be spent on aspirational or comfort goods say TV or cars or a foreign holiday. Now with an increase in inflation or increase in the prices of the products & services, this individual will save a lesser percentage say 12%. This means that this individual now has only 2% to spend on the comfort items. Thus spending of people is impacted, which in turn impacts the GDP of the country as the spent amount is reduced. Also it impacts household savings of the people as the same amount of money is now buying less. Also, this individual will now invest less as he has lesser money at his disposal.

Thus right from consumption to household savings to an economy, everything is hampered. Inflation at best should not be more than 3-4% for any economy. But the current Indian inflation of 10% (CPI) index could  spell doldrums for the nation if not addressed urgently.