Thursday, June 26, 2008

Impact of inflation on the common man

The Businessline presents evidence that even as headline inflation figures have touched a 26 year high of 11.05%, the real impact on the common man may be much smaller. By segregating only those products directly consumed by the common man from the basket of 435 commodities in the WPI, they find that the inflation for the 'aam admi' is only 7.1%. These products have a 26.32% weightage in the WPI index, and their contribution to the overall inflation is only 17%.

Interestingly, the inflation figures are negative for pulses, vegetables and drugs/medicines, and zero or negligible for kerosene and electricity. It is only fruits, edible oils and liquefied petroleum gas that have recorded double-digit rates. These trends are replicated at the retail level too.

It is oil, both petroleum and edible oils, iron and steel, which are the drivers of this runaway inflation. Petro-products, with a combined weightage of 6.99 in the WPI, have caused 16.11 per cent of the overall inflation. The edible oil complex (having a total 6.84 per cent weightage, inclusive of oilseeds and oilcakes) has likewise contributed 14.7 per cent and iron & steel (3.64 per cent weightage) another 10.93 per cent.

There are two observations in this context. One, while we can take some comfort from the fact that the direct impact on the common man may be much smaller, it may not remain so for long. The higher iron & steel, and especially petroleum prices may soon start making their impact felt on the commodities directly consumed by the common man.

Second, it is interesting that the foodgrain inflation in India has remained under control, albeit temporarily, as compared to rest of the world, and especially our neighbours. Is it because the Government has been more aggressive in its intervention with price controls, export bans and controls, and freeing up of imports in selected commodities? Have these measures had the impact of anchoring inflation expectations and containing practices like hoarding which are natural response at such times, and which are also significant contributors towards inflationary pressures?

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