Going Up? What Everyone Is Missing About Inflation!

Posted on January 3, 2010 in Business and Economy

Hari Batti from the Green Light Dhaba writes a guest post at Youth Ki Awaaz

inflation in india“It’s the traders,” says the CPI (M).

“Blame the government,” say the business page columnists.

“Blame Congress,” says the BJP.

“It’s the states,” says the Minister of Agriculture.

“My ma’am says it’s corruption,” the DU student standing next to me on the bus tells her friend.

“It’s the Commonwealth Games,” says the Delhi autowalla, though he concedes a moment later that prices are rising in the villages as well.

It seems that everyone is talking about inflation these days, which isn’t surprising, since rising prices affect us all.  And with overall food inflation running at something like 20 percent, there’s a lot to talk about.

Nearly everyone has their own theory for why this happening. Most of the explanations I’ve heard are partly right– but they all downplay one very important factor: at it’s root, this round of inflation has been made possible by an environmental crisis that only stands to get worse in coming years. And if we don’t do something soon to address it, we will be in very deep trouble.

Today I’m here to tell you simply why this is happening, and what needs to be done. That sounds easier than it is, because inflation, and the statistics we to measure it, are actually tricky beasts. I thought I’d try to be funny AND simple at the same time, but I just couldn’t manage that.  Inflation is NOT funny!  But hold on tight, and I think you will find it’s not as boring as you thought either.

I’m not going to go into all the ways economists and reporters try to measure inflation and how all those methods are flawed. That’s not needed.  But a little terminology is helpful.  Sometimes the papers report something called a “wholesale price index” or WPI, which attempts to measure changes in the prices wholesalers pay. Sometimes the papers report the “consumer price index” or CPI, which attempts to measure changes in the prices “typical” consumers pay for the goods they buy in the retail market.

Whether you look at CPI or WPI actually matters for several reasons. One is the fact that the WPI puts less statistical weight on food prices than the CPI. And since everyone knows food prices are what has been going up recently (as opposed to fuel prices, which have remained mostly flat over the past year), inflation doesn’t look so bad when you look at the WPI.  You can learn more about this in an article in The Hindu, here.But the important thing to note is that, when it comes to inflation, numbers can be deceiving.

Inflation is tricky for another reason: it can be caused by a great number of things, many of which you cannot see!  If the government prints too much money, for example, inflation will happen. If foreign investors pull their money out of a country’s economy suddenly, the value of that country’s currency will fall and inflation will result, because it will take more local currency to buy things (like oil) on the international market. These monetary factors are important in some instances, but they are not the primary cause of our most recent round price rises.

Inflation can also happen when the price of key commodities rises. A spike in the price of ipods or toaster ovens is unlikely to affect other prices, but a jump in food prices affects the whole economy, because everyone needs to eat. If a lot of workers get raises to compensate for higher food prices, that puts upward pressure on the price of the goods and services those workers produce.  On the other hand, if workers don’t get raises, they will cut back on their own consumption of things other than food, which will depress economic activity.

A rise in oil and energy prices will also affect almost everything else. This is because so much of our economy depends on oil. For example, making and transporting fertilizer is energy intensive, so more costly energy prices will affect food prices at their source. Similarly, the cost of manufactured goods jump when oil prices rise because most factories run on oil. Of course transportation costs also rise with oil prices, because it takes diesel fuel to haul food and other goods all over the country.

As noted above, fuel prices have been mostly flat for the last year; they are not the cause of our current inflation.  But our growing dependence on fossil fuels to run our economy means that when oil prices rise again, as we know they will, we will see nasty, persistent inflation, just as we did in 2008, before the world market collapsed and international oil prices plunged. (If we aren’t careful, we will also see a drop in agricultural output, as farmers will find it more and more difficult to buy the fertilizers they have become dependent on–but let’s save that discussion for another day).

So if fuel and energy prices aren’t to blame for the inflation we are seeing now, why have food prices risen so much recently?  In fact, it’s a combination of things: middlemen continue to manipulate the food distribution system at the expense of farmers and consumers; speculative traders are almost certainly holding back food stuffs in anticipation of higher prices later; and the central and state governments have not been as effective as they should be in getting food stored in better years into the market.

But underlying all these things is something else: our agricultural production has been hit hard this year by extreme weather. Most analysts predict an 8-10%  decline in foodgrain production this year, provided the rabi crop is the same as last year’s.

Everyone knows this, and almost everyone mentions it in passing–how could they not?  We all know that our rains were horrible this year, and then there was widespread flooding in the south. But weather tends to find itself above criticism, and who wants to let the bad guys off the hook because they couldn’t manage one poor harvest?

The critics of both private traders and government are right: a healthy food storage and distribution system should be able to absorb a downturn in food production…for a year or two…or even five!  Unfortunately, extreme weather is exactly what we can expect to happen more and more often as the earth’s climate changes.  And no matter how efficient our food storage and distribution system is, it won’t solve the problem of long term drop in agricultural output. This dynamic is something we detailed at the Green Light Dhaba way back in October in “The 10,000 Year Flood and Other Fairy Tales: a realistic look at India’s extreme weather.”

So what needs to be done? I don’t have all the answers, but it should be obvious that we need to take our long-term food security more seriously.  If we don’t, we may be find ourselves worrying about a word that is considerably uglier than inflation: famine.

We can start by taking the billion dollars or more that we are currently spending on our space program and using it for more useful things. India doesn’t really need a base on the moon or a space ship for space tourists.We need to point our best brains in other directions: the search for sustainable energy sources and agriculture that is drought and flood resistant. Without power or farms, what good is a ticket to the moon? It won’t pump our water; it won’t feed our families.

Of course we need to clean up our existing food storage and distribution systems. That will be a a very big, complicated job. In Delhi, we are spending a huge amount of energy and money on the upcoming Commonwealth Games. Is that effort distracting us from more important things? Maybe we need to rethink our priorities. While we’re at it, we should reconsider our military spending.

Yes, our armed forces need to be able to defend our borders and protect us from terrorism; but we need to de-prioritize big budget programs like nuclear weapons and high-tech bombers, since, as I’ve said before, these programs are more about national pride than national protection.

Finally, we need to shame the US and other European countries into taking meaningful action on climate change. Copenhagen was a fiasco, in part because our leadership’s main priority was to maintain cozy relationships with the West while protecting our right to business-as-usual development. That approach won’t work.

With rising fuel prices and more frequent extreme weather in the long range forecast (not to mention falling water tables and melting glaciers), food security will be the biggest challenge India faces in the coming decades.  We cannot afford to wait for a famine to figure this out.  It’s time we face facts and get to work.

Hari Batti writes for the  Green Light Dhaba, which serves up fresh green thinking every Tuesday and Thursday from Delhi. Hari Batti says, “If we’re not pissing someone off, we’re not doing our job. Come join us sometime! Talk is cheap and we’re a dhaba, so there is plenty to go around.”

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