Two tales of inflation and your well-being

In two days, two figures of inflation have hit the headlines – retail inflation on Monday and wholesale inflation on Tuesday. Both showed rising trend of prices for December, primarily driven by costlier food items.

The retail inflation, measured on the consumer price index, stood at almost six-year high of 7.35 per cent. The wholesale price index-based inflation stood at 2.59 per cent in December – an eight-month high. It was 0.58 per cent in November. Two different data of inflation have left many confused as to what do they mean and how they affect our lives.

First, why did inflation figures shoot up so sharply? Both were driven by onion prices which went up by whopping 455 per cent in December. Overall vegetable prices surged by nearly 70 per cent in December.

Food prices are main determinants of primary articles that carry nearly two-third weightage in consumer price index while only about 11 per cent in wholesale price index. This explains why retail inflation shot up so sharply while wholesale inflation changed moderately.

Wholesale price index is largely governed by the prices of manufactured products – those produced in factories – with over 64 per cent weightage. The inflation in manufactured products continued to be negative in December despite registering an improvement from negative 0.84 per cent in November to negative 0.25 per cent in December. This is why WPI presents not-so-worrying figure.

Onion prices jumped by 455 per cent in December pushing inflation for the month. (Photo: PTI file)

However, a deeper analysis may change our understanding. Our lives are more affected by retail inflation not only because it depends heavily on the prices of food and other primary article but also because the consumer price index factors in the medical and education inflation.

Higher retail inflation means more expenditure from your fixed salary or limited income. This also becomes a factor for the Reserve Bank of India to hike (if inflation is high) or cut (if prices are low) key rates. This, in turn, affects your EMIs against home and car loans.

On the other hand, wholesale price index is the one that determines increment in your salary. It depends on the cost of articles at factory gates. In the current situation, the WPI-based inflation went up due to soaring prices of food articles, the inflation of manufactured – you may recall – was negative, largely due to low consumption.

If consumption is less, that is demand is low, wholesale inflation remains low because the manufacturers cannot increase prices of products and expect more sales. This may, in fact, force manufacturers to announce competitive discounts to clear their stock. But that is not good news, for you or India’s economy.

This means factories or manufacturers are not earning more. So, they will not give you more increment to your salaries, and may cut down on job offers. And, this is where – more expenditure and stagnating or less earning — the current inflation-combo affects your well-being.

Source – India Today