What, exactly, is inflation anyway?

How would you calculate how the cost of living has gone up for people who live in your family? Well, one way could be for you to keep an eye on everything that your household consumes, and track how the prices of all of those things change over time.

 

So, that would include food, clothing, fuel, electricity, medicines, medicines, household consumables, eating out, movies, electronic goods, cable bills, internet bills, toys… and you could go on and on and on.

 

Of course, each of those are categories. Within vegetables you’d have to measure the price of cabbages, potatoes, tomatoes, chilis, coriander, spinach, bhindi, and on and and on. Long story short, you’d have to measure a lot of things.

 

Oh but hey, if you’re measuring your cost of living as one number, it won’t do to just measure how the price of things have changed. For example, if the price of one lemon was 2 rupees in July, but is 4 rupees in August, that doesn’t mean your cost of living has doubled, now does it? Because lemons are a very small part of your family’s total monthly expenses. So it’s not just measuring price changes, but it also involves figuring out the size of the impact of these price changes on your total expenditure.

 

Now, assuming you could do that, try expanding your analysis to your family and your neighbour’s family. The grandfather in your neighbour’s house may be taking a medicine that none of you do, while there may also be a baby in that family and so you have to think about diapers and baby food and what not. In essence, double the work.

 

Now, assuming you could do that, try doing it for everybody in your neighbourhood. Remember, your neighbourhood will involve people such as a watchman, whose consumption basket is likely to be wildly different from yours. It’ll involve people with varied economic background, varied tastes and varied consumption patterns – and therefore many, many more goods need to analyzed minutely on a month-on-month basis. Now, assuming you could do that…

 

Your suburb.

Your city.

Your district.

Your state.

Your country.

 

Here’s the point. Whatever inflation number is being reported right now is an educated guess, and nothing more. That’s not a criticism of the people who are involved in putting that number out there – I doubt a better job can be done. It simply is a statement of fact. So complicated is our world, and so many, many hajjar things are being produced in it every day, that using one number to track how prices in the economy are changing just doesn’t make sense.

 

But when we say we measure inflation in India (or any country) for that matter, that is what we essentially do: we say that prices have (on average) changed by x% over a particular time period. In the next post, we’ll find out where inflation is reported, and what to make of it.

 

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