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Inflation is all about food prices! Really??

Nowadays talks about rising inflation in India is not an uncommon phenomenon. We often encounter people around us giving their expert opinion about macroeconomic indicators in general and inflation rate in particular. I am not sure about you, but I am the one who recently got a chance to hear one such conversation that was (unfortunately) a complete nonsense. No doubt about the rising inflation for last couple of years. That fellow who happened to be an MBA from one of the popular B-schools of Pune was giving his (expert) opinion that rising food prices are alone responsible for high inflation, and that the pick up in current inflation is all due to the base effects from lower inflation in the past. I believe most of us continue to think in the same manner. This is common to hear that inflation is all about food prices. Inflation stripped of food and energy, or other volatile components, is still rising; and the common man’s notion is that depressed inflation in the past couple of years exaggerates the rise in inflation during late 2010 and early 2011 on a year-on-year basis. But does the thinking of my friend and many others like him is supported by data? Let’s have a look into the trend of historical data on inflation (and for the sake of more sound empirical proof: data on WPI).

For those who are not aware of the fundas of WPI,  I would like to tell them that the Wholesale Price Index or WPI is the price of a representative basket of wholesale goods. Some countries use the changes in this index to measure inflation in their economies, in particular India – The Indian WPI figure is released weekly on every thursday and influences stock and fixed price markets. But, the Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions.

Following graphical trend projects the movements in WPI during April 2005 and December 2010 on a month-to-month basis.

The next graphical representation shows the fluctuation in inflation during January 2005 and January 2011. Don’t you think people are exaggerative while relating inflation to rising food prices or oil prices on a stand alone basis? Inflation has, obviously relation to loads of other factors. Each factor might be unique in its characteristics and impact on the macroeconomic indicator.

We often tend to overreact to the economic indicators, more interestingly, much more beyond what we could understand with our skills and knowledge. People have many myths about inflation in particular and in economics and finance in general. Here you can get to read about a Rediff article about the Eigth myths about inflation. I hope now you would feel like more informed about inflation, isn’t it?

Keep exploring and expanding the boundaries of your knowledge!

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2 Responses

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