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Rising prices of vegetables and other commodities tilt the scales against the consumer.

Parvatha Vardhini C

These days, ‘Inflation’ is the word on every policy maker’s lips. The media has devoted so much print space and air time to it that you cannot miss this basic fact — the country’s inflation rate is beyond acceptable limits.

What has triggered this spurt? How does high inflation affect the country as well as the common man?

A school textbook on economics would give us a simple definition of inflation — ‘too much money chasing too few goods’.

When there is increased circulation of money and easy availability of credit in the country, there is a general rise in demand for goods; suppliers, who do not foresee this sudden surge, cannot meet the higher demand.

This directly leads to a rise in price levels, which is otherwise termed as ‘inflation’. But wait! If you have been following the news carefully, you might wonder whether the current inflationary pressure is really due to ‘too much money’ doing the rounds.

Has not the tightening of purse strings by banks (read hike in interest rates) shrunk the availability of credit in the past few months, leaving the common man with empty pockets? Then, where is the money to chase these goods? This takes us to the other side of the inflation coin, commonly called ‘supply side inflation’.

While a part of the current inflation can be attributed to high disposable incomes eliciting demand (read demand side inflation), a trigger has come from the supply side too.

For example, besides heightened demand, limited land and water resources, low grain stock reserves and increasing diversion of food for bio-fuels have all constrained availability of food and have taken global food prices to unprecedented highs in 2007-08. Ditto with respect to oil and steel prices.

Inflation, whether demand or supply-driven, leads to some macro-economic consequences.

First, the increased price levels mean that your purchasing power will go down. For example, if you were able to buy a kg of potato for Rs 20 last year, you may be able to buy only half a kilo for that price today due to inflation. As you have to shell out more for your normal requirements, very little is left for savings. Hence, the surplus money that you would otherwise have saved in a bank or invested in the markets is reduced, leading to lower investments.

Lower capital investments by companies (which may not get enough bank credit or equity investments) may lead to lower output, causing an industrial slowdown, which is unhealthy for a growing economy. This is where banks intervene to reduce interest rates, free-up money and encourage people to borrow so that growth does not get affected.

Many times, however, inflation doesn’t always follow a text-book pattern, beginning with price rise and ending with a rate cut. There are shades of grey.

Like the situation we are faced with today. India has been seeing copious inflow of foreign funds since last year and policy makers have intervened by increasing interest rates to reduce the availability of credit/money in the country.

With inflation nowhere in the picture, high interest rates have already taken a toll on rate-sensitive sectors, such as consumer durables and auto, thus slowing down consumption. January and February IIP (Index of Industrial Production) numbers indicated a possible slowdown in capital goods, pointing to a pause in investments as well.

It is at this critical juncture that spiralling inflation has taken centre-stage. Banks, which were otherwise planning a rate cut to boost the slowing economy, are now in ‘wait and watch’ mode and the government is faced with a balancing act between containing inflation and freeing up money for growth.

One, it means high food and edible oil prices

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