How not to think about inflation
Caravan magazine, January 1, 2012.
A certain kind of history, beloved by the Victorians and the Edwardians, made much of the significance of particular dates—history by the numbers, with a few years remembered for their momentous events (and always for just one) while all the others are relegated to obscurity. Unsurprisingly, this sort of list-making still flourishes in our schools, where one might be forgiven for thinking that nothing of note happened in India between, say, 1707 (“Death of Aurangzeb”) and 1757 (“Battle of Plassey”). Along similar lines, for modern Indian schoolchildren, the year 1974 figures as an “important date” because of the nuclear “device” detonated at the insistence of that Bangladesh-liberating, Pakistan-splitting only-man-in-the-cabinet, Indira Gandhi.
But 1974 was noteworthy for another reason, and one that children are unlikely to be memorising: through the entire year, the country’s inflation rate was never lower than 20 percent. September 1974, in fact, was a “record month”: inflation as measured by the wholesale price index touched 33.3 percent. (In other words, prices were a full one-third higher than a year earlier.) Perhaps it should come as no surprise that Mrs Gandhi, never less than shrewd, chose that particular year—when the average Indian was earning essentially the same pitiful amount as he had done a year earlier (as was typical in those years of anaemic growth) while paying at least 20 percent more for his meagre purchases—to set off a bomb and whip up the jingoist fervour so beloved of embattled politicians.
If this was the gambit, it seems to have worked, because one rarely hears talk of the fact that 1974 marked the worst inflationary episode in the history of independent India—even worse, though only slightly, than the only comparable period, between 1979 and 1981, when wholesale price index inflation remained in the double digits, often above 15 percent, for more than two years. Looking back today, in the midst of another sustained period of high inflation that began in mid-2010 and has continued for roughly the past 18 months, one sees both similarities and contrasts: as in 1974, the present spell of inflation has taken place against the backdrop of a global spike in crude and commodity prices and a period of economic weakness in the developed world. But in many other ways, today’s crisis looks very different from the one an earlier Mrs Gandhi had faced: inflation has peaked at around 11 percent and mostly remained in the high single-digits, which would have represented a trough in either earlier cycle. At the same time, the average Indian now sees his or her purchasing power double roughly in a decade; under the growth rates that prevailed between 1965 and 1979, doubling per capita GDP would have taken a century.
Judging from the exasperation seen in the press at the government’s failure to rein in inflation—invariably accompanied by the fear that high inflation will irretrievably damage the “India growth story”—Indians are clearly agitated about inflation. And there are perfectly good reasons to worry. While the current bout of inflation is far less severe than those India has experienced in the past, several troubling aspects stand out: first, that it came in the wake of a period of broadly low and stable inflation, with a quick spike and a very slow return to “normal” levels; second, that while overall inflation hasn’t touched the heights seen in earlier such episodes, it has remained steadily high in large part due to more drastic spikes in food prices—which also means that this wave of inflation has disproportionately hurt the poor. Food inflation has begun to moderate in recent weeks, as one might expect after a reasonable monsoon. Yet this is hardly cause for comfort. Indeed, the very fact that food prices ebb and flow so sharply with the seasons points to serious structural problems that underlie the way Indian inflation behaves.
… This piece can be read in full at http://caravanmagazine.in/Story/1224/Fear-of-Large-Numbers.htmlSource: caravanmagazine.in