Economic aggregates tell us a lot—and very little.
Take the case of inflation, the one economic number that just about everybody understands. The Indian government publishes five measures of inflation—one for wholesale prices and four for consumer prices. Each number gives us a slightly different picture of how fast prices are rising. Galloping food prices will push up the consumer price index for agricultural labourers more than it will the index for urban non-manual workers. Why? Because farm labourers spend a bigger portion of their wages on food compared to office workers.
These distinctions are important at the individual level as well. I may be spending more on medicines than the colleague across the hall at office. He may be running up a large telephone bill because of the desire to keep in touch with a family strewn across the globe. So, a rise in the cost of medicines or call charges will affect the two of us in different ways.
Each of us has a unique inflation rate. Britain’s Office for National Statistics (ONS) has recently come up with a contemporary solution. Since 15 January 2007, it has put up a personal inflation calculator on its website (www.statistics.gov.uk). British citizens can go to this site and punch in their personal expenditure patterns. The official statisticians have already updated prices on the website. So each citizen can calculate how inflation hurts him or her—and how this personal inflation rate compares to the official inflation rate. That’s not a bad piece of information to have around when you meet your boss (or editor) when salaries are being reviewed.
Most developed economies have a single national consumer price index. This broad aggregate hides important differences at the individual level. The BBC ran some mock data on the ONS website, and the calculator threw up a range of inflation numbers. For example, a single person who has not yet retired would have an inflation rate of 5.1%, while a family of two adults and children would be experiencing a far more steep inflation rate of 6%.
There are two lessons for Indian policymakers. First, there is a need for multiple inflation indicators. As part of the long-overdue attempt to overhaul our national statistics, the government is planning to build a national consumer price index. That will undoubtedly be of great help for economists and policymakers. But the four separate consumer price indices also need to be nurtured, rather than abandoned. They, too, will help us understand how inflation is affecting different sections of society.
We need more inflation indicators, not fewer.
The second big lesson: The way inflation is measured has to be reconsidered. As in other countries, our inflation indices are weighted by consumption. Or, in other words, items that people spend more on are given more importance than the items they spend less on. For example, the CPI for agricultural labourers gives a 72.94% weight to food, beverages and tobacco; the weight for these essentials in the CPI for urban non-manual workers is only 47.13%. The weights for education are 0.39% and 4.58%, respectively.
Now, these weights are based on consumer surveys done in the 1980s. But Indian consumer patterns have changed remarkably over the past two decades, as income levels have gone up. Food is accounting for a smaller part of family budgets; stuff such as education, health, entertainment and communication is increasing in importance. In a recent report, McKinsey Global Institute estimates that spending on food, tobacco and beverages will fall from the current 42% of consumer spending to 25% by 2025; spending on health care will rise from 4% to 13%.
Such changes in spending patterns could have a significant impact on inflation rates in the future, which is explained by the Balassa-Samuelson Effect, named after two economists, Bela Balassa and Paul Samuelson. Here’s how the theory goes. When productivity gains in a transition economy are concentrated in the tradables sector, the relative price of non-tradables tends to increase. For example, a barber cannot snip hair off more than a certain number of heads, no matter how many machines he has. But his wages will increase in tandem with wages in the rest of the economy. The only way he can maintain his standard of living is by charging higher prices. It’s the same for doctors, teachers or dosa flippers. The price of their services will rise faster than prices of industrial goods.
These are the sorts of services that Indians will consume in larger quantities in the future. A faster growth in their prices will mean that consumer inflation rates in India will tend to rise at a quicker pace. All these trends—be it personalized inflation rates or higher consumption of services—have been used to suggest how complex the inflation issue really is.
It is not something that can be captured in one headline number.
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