High inflation implies the same amount of money buys fewer goods

High inflation implies that the same amount of money buys fewer goods. The rupee has plunged more than 20% in the past four months, making RBI’s job to cut interest rates hard.

What does the latest inflation data say about price trends in the Indian economy?
India’s wholesale prices grew 6.10% in August, the highest in six months, driven largely by high vegetable and onion prices. Vegetable prices grew 78% in August compared with the same month last year, while onion prices shot up by 245% during the month. Overall food inflation in August stood at 18.18% compared with 11.91% in July.

How do high food prices hurt families?
Sharply rising food prices hit family budgets hard. The same amount of money now buys fewer goods. Clothing, medical care, education, travelling, communication, recreation, eating out and most services too have turned dearer over the past 12 months.

What are the implications of high inflation in the current economic scenario?
High inflation will limit the Reserve Bank of India’s elbow room to cut lending rates. When growth falls, it is usually expected that the central bank cut interest rates to boost demand and spending. But in the current economic situation, where the domestic currency — the rupee — has plunged more than 20% in the past four months, the RBI can ill-afford to reduce borrowing costs as more liquidity can weaken the rupee further.

What does this imply for final consumers?
In the past three years, home loan EMIs (equated monthly instalments) has steadily gone up. Since they cannot be reduced, family budgets are squeezed by cutting down on regular expenses, even on items such as clothes and consumer durables. Higher prices and need to find additional money for EMIs have forced cuts on purchases of televisions and cars.


How can we say from inflation data about muted demand for manufactured goods?
Manufactured goods’ inflation or what economists call the core inflation— non-food, non-fuel inflation — stood at 1.9% in August. At a time when raw material and borrowing costs are rising, the low core inflation can largely be explained by weak demand for goods. Factory output data, which was released last week, also point towards similar trends. Consumer durables output shrank by 0.9% in July, mirroring deferred purchases of televisions and cars.

How have these hurt companies?
The resultant fall in demand has hit companies hurting their revenues. Costly borrowings and inputs have dampened investments as firms defer capacity expansion plans, hurting job prospects. Companies have pruned wage bills to cut corners in difficult times, offering lower salary hikes that barely take care of rising prices.

What’s the outlook on the price front?
A normal monsoon this year would help tame food prices. But the currency’s sharp slide can negate much of these gains. Fuel prices are expected to go up on high crude import costs. This can fan inflation and the family budget will take another hit on fresh price hikes.


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