Simply put, Inflation is rise in prices of commodity basket relevant to a base year. Conversely, it also represents change (usually downward) in buying power of a single monetary unit.
Method for inflation calculation
Most developed nations calculate inflation based on Consumer Price Index (CPI). India has adopted Wholesale Price Index (WPI). WPI is calculated on a weekly basis with a lag of 2 weeks. It is the index (base year 1993-94) of weighted average of prices of commodities.
In India, Office of the Economic Adviser (OEA) - attached to Ministry of Commerce & Industry – is responsible for Compilation and publication of the weekly WPI.
Why is inflation rising?
Qualitatively economists generally are blaming the global inflationary trend on 2 basic reasons – rise in fuel prices & rise in food prices.
Quantitatively here is the trend of inflation in current calendar year. Now let's to look under the covers for constituents of WPI in India. WPI is calculated based on 3 commodity groups:
1) Primary Commodities
2) Fuel, Power, Light & Lubricant
3) Manufactured Products
Each commodity in these groups & in-turn the groups themselves have weights assigned. And now the all too revealing WPI movement across the commodity groups the same period! (Chart 2)
Method for inflation calculation
Most developed nations calculate inflation based on Consumer Price Index (CPI). India has adopted Wholesale Price Index (WPI). WPI is calculated on a weekly basis with a lag of 2 weeks. It is the index (base year 1993-94) of weighted average of prices of commodities.
In India, Office of the Economic Adviser (OEA) - attached to Ministry of Commerce & Industry – is responsible for Compilation and publication of the weekly WPI.
Why is inflation rising?
Qualitatively economists generally are blaming the global inflationary trend on 2 basic reasons – rise in fuel prices & rise in food prices.
Quantitatively here is the trend of inflation in current calendar year. Now let's to look under the covers for constituents of WPI in India. WPI is calculated based on 3 commodity groups:1) Primary Commodities
2) Fuel, Power, Light & Lubricant
3) Manufactured Products
Each commodity in these groups & in-turn the groups themselves have weights assigned. And now the all too revealing WPI movement across the commodity groups the same period! (Chart 2)If one closely looks at the various commodity movement in chart 2, then the correlation between recent spurt in “Fuel, Power, Light & Lubricants” group & the one in Inflation % is quite obvious! So in short the figures corroborate (to a large extent) the qualitative information. A little more drill-down into data shows aggressive movements in past 1-2 months in Mineral Oils, LPG, Petrol, Aviation Turbine Fuel etc.
Macro economic strategies of various countries
While India has placed more importance on arresting inflation; the USA seems to be going after “Growth” issue. For India, growth is not a challenge in the present situation while USA seems to have put Inflation management secondary to solving looming recession. The macro measures these two countries are taking are representative of what issues are more important to them. USA is slashing interest rates whereas India is raising those! This clearly indicates that USA Fed wants to encourage speding (by improving money supply) so that they tackle the “Growth” problem. However for India, restricting the money supply (to arrest inflation) is the way to go by increasing the cost of borrowing.
It is also said that rising crude prices are in the best interest of not only the oil producing nations but also of USA (apart from it's role in oil production). The simple logic provided is that bulk of oil trades happen in US Dollars. More the price per barrel in USD, more the demand for Dollars in international market. This helps create one of the many outlets for absorbing the rising Dollar supply. While to some extent this may save falling Dollar, it definitely adds to global inflation!
Well, this is just a scene when we look at 2 national economies. Once we start looking at all major nations, the situation becomes quite complex. One would wonder if there is any way out! The answer is not that simple. Probably one of the initial ways is to look at world as one whole economy rather than individual nations. This role being already played collectively by WB, IMF & UN, it is interesting to see how far the major national economies of the world stretch the current global monetary system. The more conflicting the national strategies, the faster we accelerate shift from current monetary system. More about the monetary system(s) in subsequent posts.
Macro economic strategies of various countries
While India has placed more importance on arresting inflation; the USA seems to be going after “Growth” issue. For India, growth is not a challenge in the present situation while USA seems to have put Inflation management secondary to solving looming recession. The macro measures these two countries are taking are representative of what issues are more important to them. USA is slashing interest rates whereas India is raising those! This clearly indicates that USA Fed wants to encourage speding (by improving money supply) so that they tackle the “Growth” problem. However for India, restricting the money supply (to arrest inflation) is the way to go by increasing the cost of borrowing.
It is also said that rising crude prices are in the best interest of not only the oil producing nations but also of USA (apart from it's role in oil production). The simple logic provided is that bulk of oil trades happen in US Dollars. More the price per barrel in USD, more the demand for Dollars in international market. This helps create one of the many outlets for absorbing the rising Dollar supply. While to some extent this may save falling Dollar, it definitely adds to global inflation!
Well, this is just a scene when we look at 2 national economies. Once we start looking at all major nations, the situation becomes quite complex. One would wonder if there is any way out! The answer is not that simple. Probably one of the initial ways is to look at world as one whole economy rather than individual nations. This role being already played collectively by WB, IMF & UN, it is interesting to see how far the major national economies of the world stretch the current global monetary system. The more conflicting the national strategies, the faster we accelerate shift from current monetary system. More about the monetary system(s) in subsequent posts.
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2 comments:
Good start Ashutosh! Looking forward to reading more such informative stuff
#madhu [aka madhu gopinathan]
Thanks Madhu! Glad to get back in touch.
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