Business news journalists live and breathe inflation. They track every data point and plot every trend. So, when you happen to catch a discussion on inflation on a popular general news channel, you can’t help but listen, even if by the end of it, you’re pulling your hair out.
Case in a point—a rather lively (to put it politely) 10-member debate last night on what is said to be India’s most-watched prime time news show. The topic was the performance of the Narendra Modi government in its first year in office and the conversation veered around to inflation. The panel consisted largely of politicians, political journalists and one lone businessman-turned-activist, which meant that the discussion was largely political. Fair enough, given that elections have been fought and lost on the price of onions.
Even so, a few facts about inflation may be useful for these esteemed journalists before they launch into their next discussion on inflation.
Argument 1: The government’s track record on inflation management has been poor, said the news anchor. The reason behind that assertion was that the government had promised an actual decline in price levels rather than a “mere” decline in the rate of increase in prices (aka inflation)
Fact check: Inflation by the very definition of the word is the rate at which prices are rising. A fall in general price levels is known as deflation—a word which sends economists and central bankers into a tizzy. Deflation is not welcome news for any economy. It typically reflects weak demand, which in turn, is a reflection of a weak economy. The mere threat of deflation generally pushes central banks into overdrive as they try and counter a phenomenon which is typically tough to reverse. Look around the world. Central banks from the Bank of Japan to the European Central Bank and the US Federal Reserve have been trying to fight deflation.
Now, I have no idea whether the government actually promised a lowering of prices at the time of the elections, but if they did, they too could benefit from academic literature on inflation and deflation.
As things stand, the inflation rate in India has come down. Actual prices have not and that’s a good thing.
Argument 2: The inflation rate does not reflect the perception of people. People are still worried about rising prices. That was the argument made by a second journalist on the panel.
Fact check: Agreed. The perception of inflation is almost as important as inflation itself. We actually have a measure for it and it’s called ‘Inflation Expectations’. Central banks measure inflation expectations because they tend to feed into wages and price decisions and eventually into price levels. In India, the Reserve Bank of India conducts a quarterly inflation expectations survey, which is used as an input in its interest rate decisions. It captures the inflation expectations of nearly 5,000 urban homes across 16 cities. The latest inflation expectation survey shows that expectations of inflation (three months ahead and one year ahead) fell sharply between September and December and since then have risen marginally.
So, there is some truth to the fact that there is still a disconnect between actual inflation and inflation expectations, but the fear of price rise in the households has come down from the high levels it was at between mid-2013 and mid-2014.
And finally: The debate in question did not go into the issue of interest rates (or at least not before I switched channels) but it would have been interesting to see how this same panel would approach the issue of interest rates.
If they feel that inflation is still high and needs to be brought down much further, then would they support an increase in interest rates? Or atleast not call for further rate cuts? The two are linked, remember? But we’ll save that lesson for another day.