Inflation demystified

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Inflation and its calculation in the Indian context

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Inflation demystified

  1. 1. Impact of Inflation<br />J.Karthikeyan<br />Director – Research & Consulting<br />Finerva Financial Solutions Pvt Ltd<br />
  2. 2. What is Inflation?<br />It is the rise in prices of goods and services.<br />
  3. 3. What is Inflation?<br />How is it measured?<br />By Creating an Index<br />Measuring the rise or fall in the index value<br />Methodology and Frequency of Data Collection for index is predetermined<br />India – WPI, CPI<br />
  4. 4. Idiosyncrasies in our Index<br />Weightages and Constituents:<br />Name of Commodity : Telephone Instruments <br /> Weight: 0.05208<br />Name of Commodity : Railway Sleepers<br /> Weight : 0.09898<br />Name of Commodity : Zerda <br /> Weight : 0.03557<br />Name of Commodity : T.V. sets (B&W) <br />Weight : 0.37192<br />
  5. 5. Theories of Inflation <br />Demand – Pull Inflation Theory - Housing<br />
  6. 6. Theories of Inflation <br />Cost – Push Inflation (Supply Shock) Theory - Oil<br />
  7. 7. Theories of Inflation <br />Built – in Inflation – Agricultural Products (Milk, Rice, etc), Pay hikes<br />
  8. 8. Who is Affected by Inflation?<br />The Citizens – Different Classes<br />
  9. 9. Who is Affected by Inflation?<br />The Industries – Domestic, Exporters & Importers<br />
  10. 10. Who is Affected by Inflation?<br />The Government – Regulators, Political<br />
  11. 11. Can I See Inflation? - Citizens<br />Yes, you can!!!! Inflation is more than just a number.<br />
  12. 12. Can I See Inflation? - Citizens<br />Price of Petrol, Price of a loaf of bread<br />Cost of education<br />
  13. 13. Can I See Inflation? - Citizens<br />Salary increments have no meaning<br />Effective returns come down<br />More expenses – difficulty @ retirement<br />
  14. 14. How will it impact me? – Business Manager<br />Companies closing down – Pioneer Poultry<br />Dreams Shattered – Tata Nano<br />Targets not Achieved – Fridges, Washing Machines, Bikes<br />New projects are costlier – Break-even longer<br />Exports becoming costlier. Imports not justifying the returns.<br />
  15. 15. What can I do about it? - Regulator<br />Controlling Money Flow – Economic Theory<br />Increasing CRR & SLR (To reduce money supply)<br />Increasing Interest Rate (To reduce money demand)<br />Ultimately reducing purchase and production<br />
  16. 16. What can I do about it? - Regulator<br />Controlling Money Flow – Economic Theory<br />Increasing CRR & SLR (To reduce money supply)<br />Increasing Interest Rate (To reduce money demand)<br />
  17. 17. What can I do about inflation? - Politician<br />Subsidies<br />Change in powers<br />Blame-game<br />
  18. 18. Impact on the Economy<br />Exponentially higher social cost – less savings, less infrastructure, higher dependence<br />
  19. 19. Impact on the Economy<br />Exponentially higher social cost – less savings, less infrastructure, higher dependence<br />Hoarding of goods – leads to sudden spurt in demand – fueling further inflation<br />Rebalancing in investment portfolios – preference to retain assets than produce<br />
  20. 20. Impact on the Economy<br />Exponentially higher social cost – less savings, less infrastructure, higher dependence<br />Hoarding of goods – leads to sudden spurt in demand – fueling further inflation<br />Rebalancing in investment portfolios – preference to retain assets than produce<br />
  21. 21. Hyper Inflation <br />Zimbabwe: 355,000% now-a-days<br />Argentina: 200% in one month alone. 5000% in 1989<br />Russia: 2000% in 1992<br />
  22. 22. Are we in an OK state today?<br />Based on Oil Prices alone – Yes we are Ok.<br />Lessons to learn – Reduce oil dependence, - get strategic reserves, find other sources<br />Don’t meddle with the economy – subsidy is only charging a bill elsewhere.<br />Not to make it political<br />To accept that some inflation is good<br />

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