India's Inflation
April 3, 2008 - 8:07 AM
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Inflation is a rise in the general nominal level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services. In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates.

Measures of Inflation

  • Consumer price indices - (CPIs) which measure the price of a selection of goods purchased by a "typical consumer."
  • Cost-of-living indices - (COLI) are indices similar to the CPI which are often used to adjust fixed incomes and contractual incomes to maintain the real value of those incomes.
  • Commodity price indices, which measure the price of a selection of commodities.
  • Producer price indices (PPIs) which measure the prices received by producers. This differs from the CPI, in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid.

Inflation in India remains much lower than in many other developing countries. But prices are rising more than twice as fast as in China, India's chief rival for foreign investment and economic leadership among emerging markets. Prices are also increasing considerably faster than in industrialized countries. Government leaders now face the challenge of steering a fast-growing economy, which is expected to expand as much as 10 percent this year, away from a possible spiral of rising prices that could derail some of their achievements and temper the country's climb in living standards.

Rising global commodity prices (food, energy and metals) have put upward pressure on domestic prices. Contribution of basic metal prices to total inflation increased from 5.8 per cent in early 2008 to 22.2 per cent for the week, driving the overall increased contribution from manufactured products. But if we exclude the basic metals, contribution from manufactured goods actually fell from 53.4 per cent to 30 per cent during same period. Lehman Brothers note that a number of items in the iron and steel category saw higher price revision, either in the week ended March 8 or March 15. With prices having remained unchanged for 27 weeks in some cases, and 185 weeks in another, the authorities have raised reported prices by 10-34 per cent over the last two sets of data.

Other categories that have contributed to higher inflation are edible oils, pulses and processed food. The contribution of primary articles increased from 21.8 per cent in early 2008 to 26.1 per cent in the week ended March 15, 2009 while the contribution of fuel price inflation rose from 19 per cent to 21.3 per cent.