Inflation and cheap talk

Inflation and cheap talk
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First Published: Mon, Aug 10 2009. 08 47 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Aug 10 2009. 08 47 PM IST
It is interesting to note that in recent speeches, Prime Minister Manmohan Singh and Union agriculture minister Sharad Pawar have conceded that we may be headed for inflationary times. What is debatable is whether this was an admission of administrative failure or a deliberate airing of bad policy signals. What is not debatable is that such statements stoke inflationary expectations.
Illustration: Jayachandran / Mint
Among the various exhortations in his address at the conference of state chief secretaries, the Prime Minister said, “...at the same time, we need to be aware of the possibility that reduced production of kharif crops in the current year may have an inflationary impact on the prices of food items in the coming months”. On the same occasion, Pawar said that unless effective steps are taken to prevent black marketeering and hoarding, we will not be able to control the price situation.
Even a decade ago, such statements would have created a furore and led to charges of administrative incompetence. In the earlier life of the republic, it would have posed formidable political problems. But today, everyone takes them in their stride, knowing well what the government is capable of.
Some facts are clear. While the Wholesale Price Index fell by 1.57% during the week of 25 July over the corresponding period last year, the food articles sub-index rose by 9.66% during the same period. For the common man, this is the inflation that matters. The Consumer Price Index for urban non-manual employees, a more appropriate measure of the inflation that prevails in retail markets, continues to be pretty high at 9.7% in May.
It is this background that makes the statements interesting reading. While they are directed against hoarders and speculators, what they do is send out a signal that inflation is acceptable. The inflation transmission process usually begins with such signals. “Bold” speculators and hoarders use such stimuli to engage in markup pricing of the kind that is unacceptable in conditions of sound administration. Soon, others follow them in the chain.
This is what the Harvard University economist Harvey Leibenstein had to say in his study on the process of inflation transmission: “Higher prices set by some lead to initial losses to others. Losers in weak markets attempt to make up or more than make up for these losses in their strong markets. A general price rising tendency sets in which results in a partial loss of productivity, and higher costs than otherwise”. While one can’t bemoan speculators for doing what they do, our leaders surely can desist from egging them on.
Will the PM’s speech fuel inflationary expectations? Tell us at views@livemint.com
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First Published: Mon, Aug 10 2009. 08 47 PM IST