Why is Raju worried with high inflation?
Inflation, or the rate of price rise, as measured by the consumer price index (CPI), for November has come in at 5.5%, the highest in nearly three-and-a-half years. The primary reason for this is very high food inflation of 10%. Vegetable prices rose 36% last month compared with those a year ago. Among vegetables, prices of onion have gone up 144.6%, garlic 144.2%, tomato 59.6%, cabbage 35.8% and cauliflower 23.7%, respectively, though peas are 15.6% cheaper than that of last year. All this has put Raju’s finances under strain, especially when his company has been cutting production dramatically this year.
What is the effect of high food prices?
Raju’s family has had to cut down dramatically on their consumption of onion, garlic and tomatoes. Food just doesn’t taste the same without these ingredients, but then, tough times call for tough measures. What hasn’t helped is that pulses are 13.9% costlier, with the price of arhar dal rising 24% and urad dal 20.6%. His largely vegetarian family’s protein consumption has also taken a hit. Thankfully, fruit prices have risen just 3.3% in the last one year, with the prices of apples and grapes falling 1.4% and 3.6%, respectively. If their prices had also gone up, Raju’s young children would have had to cut down on fruit, too.
What about non-food inflation, then?
Food inflation for November was at 10%, the first time it touched double digits in the last five years. Interestingly, core inflation was at 3.3%, the lowest in the last five years as well. Core inflation is the inflation of items, which are left after leaving out food, fuel and light products, that are part of the consumption basket on which inflation is calculated.
What’s the implication of this phenomenon?
Take a look at the accompanying chart. Over the last one year, the two curves in the chart, food inflation and core inflation, have been travelling in different directions, with food inflation now at a five-year high and core inflation at a five-year low. Core inflation being at a five-year low indicates the sluggishness of economic activity. This is better illustrated by inflation, as measured by the wholesale price index, which in October 2019 was at 0.2%, almost in deflationary territory.
How do things look for Raju in the new year?
With economic activity down in the dumps in the country, it is unlikely that Raju will receive any salary increment in 2020. At the same time, he and his family will have to deal with high food prices, at least in the first few months of next year, until the vagaries of both weather and politics sort themselves out. All in all, it won’t be a happy new year for Raju in particular and the salaried Indian in general.
Vivek Kaul is an economist and the author of the Easy Money trilogy.
