Inflation - My few cents --

Inflation has become a phenomenon which every one would like to discuss now-a-days. For some it's a golden opportunity to blame government, for others it's coffee-break and for many more it's just a way to show how the living cost is increasing.

Inflation is commonly calculated in India based on difference in averaged WPI (Wholesale price Index) over a period of time. This might not be the exact cost increase which consumers encounters, which is captured in CPI (Consumer price Index). Major developed economies uses CPI as indicator whereas India uses WPI, because of complexity of its trade. So a 6% inflation might mean to you 10% increase in prices.

Now i'll look into why we are encountering hight inflation ?

Before that, Inflation is not a phenomenon happening in Indian alone. In fact global stage in watching this drama, like UK is at 2.5% (way above their expectation)

So blaming government policies might be one of the reason. But i believe government policies comes into picture when raising supply side or curbing at later stage. But this time this inflation got some in-built features.

Change in Preferences: Since this group is mainly for people trading in stock market, it would be easier to understand some of the things. Stock market has boomed, largely driven by Profit growth posted by Companies. But have you ever twigged about the reasons ?

This high profitability is largely driven by Increase in Demand. High growth have fueled demand, both from retails as well as input perspective. Consumers have got large disposable income and hence there demand for food products have increased (Although not in proportion to their ever growing salaries). Increase in organized retail inc makes the problem more severe, as they target to people belonging to cadre of high earners who are ready to pay premium. Demand for packaged food / processed food have increased which absorbs margin of different players. Since the competition is pretty high, hence increase in price payed by MNCs, which in turn cost your pocket. Since farmers get incentive there they are more willing to sell this to these companies but to government which few years back used to have control and used to buy a throw away process.

Fall in production: Past year world have seen the worst monsoon, leading in decrease in agriculture production, but the demand remains robust. Elementary economics explains rest.

Fuel oriented economics: The growth all around have increased demand for fuel, which in turn have changed focus to Bio-Fuels. Probably the most interesting factor which everyone is denying. Demand of ethanol have skyrocketed, countries like US and Europe have decided to move toward Bio-Fuel. US has requested their Auto manufacturers to achieve 20% bio-fuel driven transport by 2012. Similarly Europe. if Europe move to even 5% of existing capacity it requires half of the presently cultivated land to grow Sugarcane etc (required for ethanol prod). Demand is increasing but availability of land is not something which catches the same speed.

Bottom line.... Speed thrills but it kills.