Trouble viewing this email? View in web browser

Friday, 29 Oct 2021
A newsletter that demystifies complex economic jargon and explains how it impacts your everyday life
By Vivek Kaul

First off, here’s a great value proposition:

A digital subscription to Mint and The Wall Street Journal is yours with a flat 25% off (up to 40% off with bank offers), at just ₹160 per month. But hurry, the offer expires on October 29th. Check out the convenient and affordable plans we have for you here.

Why does inflation feel much higher than the sarkari rate? Because it is.

Baaki jo bacha mehangai maar gayi (Inflation killed whatever was left)

– Verma Malik, Laxmikant Kudalkar, Pyarelal Sharma, Lata Mangeshkar, Narendra Chanchal, Mukesh and Jani Babu Qawwal, Roti, Kapda aur Makaan.

Teenage and heartbreak go together.

In the city I grew up in, people wore the tag of being a part of the frustrated one-sided lovers’ association or FOSLA, as it was more popularly known, with great pride. Nonetheless, the big heartbreaks came not because of a crush getting crushed or, most times, not even coming to know, but when India lost a cricket match. And in the 1980s and the 1990s, India lost a lot of cricket matches, especially to Pakistan, particularly in Sharjah.

Of course, the heartbreak was also because cricket matches back then were few and far between. This dynamic was set right in the 2000s, with India playing more games, winning more matches, and of course, refusing to play in Sharjah.


A significant factor of the heartbreaks not lasting as long as they used to is that much more cricket is played now than was in the last century. So, as someone put it on Twitter after Pakistan hammered India last Sunday, grief gets less time to compound.

When Javed Miandad hit a six off the last ball in 1986 and Pakistan won, or when the pitch started turning like a top in 1996 at the Eden Gardens and India had to forfeit a World Cup semi-final to Sri Lanka, it took me weeks to recover and being my normal self.

But here I am, the morning after Pakistan beat India for the first time in a cricket World Cup, being as normal as I can be and continuing with my daily chores and writing this newsletter.

The losing doesn’t hurt anymore simply because there is too much cricket being played. An ODI series with New Zealand starts three days after the T20 World Cup ends.

While there were fewer heartbreaks when watching cricket in the past couple of decades, this has come with a new trend; through most of the 2000s and even in the early 2010s, whenever the cricket team did lose, allegations of match-fixing were made. “Must’ve been fixed,” you could hear people say confidently almost all over the place.

Dear reader, if you are the kind who is used to reading 200-word news copy or WhatsApp forwards, you must be already wondering by now, where am I going with this, blabbering on and on. Let me explain. Other than cricket, the only other place where one hears people saying “must be fixed” the most is when it comes to discussions on inflation or the rate of price rise.

In the recent past, petrol and diesel prices have crossed Rs 100 per litre and have increased almost daily. Yet, at the same time, retail inflation is less than 4.5%. How is that possible, many have wondered. So the government must be fixing it, is something that they tell themselves and to those who are willing to listen.

The point is that there is no way for someone who has an opinion on inflation to know for sure that any government is fixing the inflation data. Also, as we shall see, there are other simpler explanations.

So what about inflation in company results?

In the recent past, companies have talked about high inflation impacting their performance during the period July to September. As Sanjiv Mehta, chairman and managing director of Hindustan Unilever, told Mint in a recent interview: “In some of the commodities, inflation has been pretty much unprecedented [emphasis added].” Or, as he put it in a post-earnings media call: “We haven’t seen this kind of inflation for many years.”

Amit Syngle, managing director and chief executive officer of Asian Paints, made a similar point: “Steep inflation seen in raw material prices, since the beginning of this calendar year, has been phenomenal [emphasis added].”

While I do not track the earnings of individual companies regularly, people who do this tell me that in industry circles, the talk about high inflation is all over the place.

The prices of many inputs that go into the making of things have gone up. As Mehta told Mint: “If inflation in key commodities like palm oil…was about 100 in 2020-2021, we are now talking about 1.6 to 1.8X.”

Palm oil is used in the manufacturing of soaps and other skin cleansing and hair care products. As Mehta said in the media call: “Palm oil continues to be at record levels and witnessed further step up in this quarter [July to September].”

Then there is something known as titanium dioxide, which is used across products. I checked the packaging of the Colgate toothpaste I use, and that had titanium dioxide in it. Titanium dioxide is used in extremely small concentrations to make the colour of the toothpaste white. It is also listed as an ingredient in a bar of Dove soap I could find at home. It’s also used in paints and many other things. A report by ICICI Securities published on 14 October points out that the price of titanium dioxide in September 2021 was up 44% from September 2020.

Further, tinplate prices have risen 148% in comparison to last year, ICICI Securities points out. Tinplate is used to make the metal cans in which paint is packed. Given this, Syngle of Asian Paints said the following: “We have never seen… in the last about 3-4 decades, inflation which is so strong… Overall inflation is closer to about 18-20% levels when we see from a perspective of Q3 [October to December] of last year.”

Other than input costs, there has also been a sharp rise in freight prices (when things have to be moved internationally through ships over the sea) and transportation costs (when things have to be carried locally) due to higher diesel prices.

Essentially, all this has led to a few corporate leaders talking about high inflation impacting their respective businesses. This has led to analysts and fund managers asking why is this not reflecting in the inflation data reported by the government.

Inflation as it is measured

The most common form of inflation reported in the media happens to be inflation as measured by the consumer price index (CPI) or more popularly known as retail inflation. Look at the following chart, which plots retail inflation from January 2019 onwards.

Retail inflation has been falling over the last five months. In May, it was at 6.3%, and by September, it had fallen to 4.35%. This seems to go against the entire logic of what companies have been talking about as well as rising fuel prices.

Before we go any further, it is worth remembering what Diane Coyle writes in Cogs and Monsers—What Economics, And What It Should Be. She says, inflation is an idea and not a natural object in the world.

Hence, it is important to understand here how retail inflation is measured. A basket of goods and services is constructed to serve as an index. Each good or service has a certain weight in the index. Their prices are tracked over time, and that’s how inflation is calculated. You could say that the basket that has been constructed to measure inflation consists of goods and services in the proportion of how much an average Indian consumes them.

The trouble is, you, dear reader, are not the average Indian.

Food products make up for a little over 39% of the basket. Hence, almost two-fifth of retail inflation is food inflation. And food inflation has fallen from 5.01% in May to 0.68% in September. This is the main reason behind falling retail inflation.

Dear reader, you are reading this in English, and anyone who can read English in India is likely to be better off than an average Indian. And that being the case, chances are, food constitutes much less than two-fifths of your consumption basket. Put simply, as people earn more, a smaller proportion of their income is spent on food.

But this higher income is spent on other things, like petrol and diesel. If we look at the detailed CPI, the petrol and diesel prices in the last one year have gone up by 22.26% and 22.44%, respectively. The weight of petrol and diesel in the CPI is limited to around 2.19% and 0.15%, respectively. Of course, your transportation costs can be higher in your monthly consumption basket, and the proportion of money you spend on petrol and diesel can be much higher than their respective weights in the CPI. If that is the case, you must be feeling the pinch of inflation more than the sarkari rate of 4.35% suggests.

Also, as one makes more money, one tends to spend more on some things than others. Take the case recreation and amusement. It has a weight of just 1.68% in the index. But, for you, dear reader, that must be a joke. Chances are, you spend a more significant proportion of your income on it. And recreation and amusement prices have gone up 7.58% in the last one year.

Let’s take examples of a few other things, which have barely any weight in the index but matter to you. Taxi and autorickshaw fares are up 6.76% in the last one year.

Airfares are up 32%. Domestic cooking gas prices are up 41%.

Or let’s take the case of health expenditure, which has a weight of 5.89% in the index. Now health expenditure in a month can be almost zero if you are fit or there are no emergencies. Or it can go through the roof if there is a health emergency, like was the case with many people during the pandemic. Health inflation has been at 7.74%.

Further, clothing and footwear prices have gone up by 7.16% in the last one year.

Even under food prices, different things need to be considered. Cereal prices have been kind of flat in the last one year. The prices of eggs, fish and meat are up 7.91%. Edible oil and fat prices have been on fire, going up 34% in the past year. Prices of pulses are up 8.75%. But vegetable prices are down 22.47%. Hence, depending on what kind of food you eat, your food inflation is bound to be different from the sarkari rate.

Also, as one goes up the income hierarchy, the spending on cereals comes down, and the spending on proteins (pulses, egg, meat and fish) goes up.

As you have seen up until now, the rate of inflation of most of the items mentioned is higher than the overall inflation rate of 4.35%. If these are the items that you consume more, then it explains to a large extent what you deem to be the real rate of inflation feels higher than the sarkari rate.

In fact, if we look at just non-food inflation part of overall retail inflation, which is perhaps more relevant to the people reading this, it has been around 6.5-7% over the last few months.

Retail inflation also varies across different states and Union Territories. Let’s take the case for September. The Union Territories of Jammu and Kashmir and Ladakh had the highest inflation of 7.39% . But their weight in the overall index is just 0.94%. Odisha had the lowest inflation of 1.43% in the last one year. It has a weight of 2.18% in the overall index. Maharashtra has the highest weight of 13.18%, followed by Uttar Pradesh at 12.37%. The inflation in the two states stood at 4.59% and 4.12%, respectively. The inflation trajectory in these two states has a significant impact on the overall inflation in the country.

What about all the talk about never before seen kind of inflation?

Other than retail inflation, the government also declares inflation as measured by the wholesale price index (WPI) every month.

The inflation as measured by the WPI has been in double digits since April, though at 10.66% in September, it was lower than 11.39% in August. If we look at April to September 2021, the WPI inflation stood at 11.58% this year, against a deflation of 0.88% last year. Falling prices are referred to as deflation.

In fact, look at the following chart, which plots the inflation of manufactured products, which form 64.23% of the WPI.

This chart clearly explains the bit about the never before seen kind of inflation. The curve in the chart has been rising for more than a year now. Within inflation of manufactured products, textiles inflation was 16.81%, chemical and chemical products inflation was 13.09%, and basic metals inflation was 26.71%. So, those who have been asking why inflation hasn’t been showing up in data have been looking at the wrong kind of inflation.

Some of this inflation has seeped into retail inflation, but the extent to which you have been impacted by it depends on your consumption basket or what exactly you consume. Take a look at the price increases of fast-moving consumer goods. The price of toilet soap is up 7.86%. Toothpaste prices are up 4.84%. Shaving blades are up 6.07%. And shampoo and hair oil prices are up 5.04%.

Also, not all the increase in inflation has been passed on to the retail level. As Mehta told Mint: “When you have this kind of inflation, then our endeavour always is that we should first protect the consumer franchise. We don’t want to lose consumers.”

But if wholesale inflation persists, this protection cannot continue, and retail sarkari inflation will also rise. Both Asian Paints and Hindustan Unilever are planning calibrated price hikes.

It is also worth remembering that the government’s aggregate retail inflation number every month is just one figure put out for all of India. And given that, it is bound to feel wrong at an individual level.

To conclude, as strange as it might sound, the inflation figure at an aggregate sarkari level might be useful for the government and the Reserve Bank of India to decide what economic policies to follow, but it’s largely useless at yours and my level, simply because our consumption patterns are very different from that of the average Indian.

So, if you feel that inflation is higher than it used to be, then chances are that you are correct because, at the end of the day, you are the best judge of how much money you were spending and how much money you are spending.

But that doesn’t mean that the sarkari inflation figure is fixed.


Vivek Kaul is the author of Bad Money and was once labelled Twitter’s favourite economist. Have any feedback? Send in your bouquets and brickbats to him on Twitter.

Were you forwarded this email? Did you stumble upon it online? Sign up here.

Download the Mint app and read premium stories
Google Play Store App Store
View in Browser | Privacy Policy | Contact us You received this email because you signed up for Mint Top of the Morning or because it is included in your subscription. Copyright © HT Digital Streams. All Rights Reserved