Inflation: One point we seem to miss
We all see lot of news paper articles on Inflation. Rising fuel prices, rising food prices, rising costs of house, rental values, rising cost of toileteries and we wonder why doesnt the govt do something...
There are many factors for inflation:
(1) Speculation
(2) Demand supply gap which leads to higher costs, thereby rising inflation
Both these reasons inturn have many sub reasons.
Let me pick up the Second point: Demand Supply Gap
There can be 2 sub reasons for demand supply gap:
2.1 Artifically create less supply of materials by hoarding items.
2.2 There is a geniune demand supply gap.
Let Us take the Second scenario i.e. there is actully a demand supply gap.
Now this can inturn have many reasons:
2.2.1 Bad mansoon spoils crops so supply of edibles reduced.
2.2.2 Consumption has increased and supply has not grown accordingly.
Lets take the second scenario i.e. Consumption has increased
Now this inturn can be because of various reasons
2.2.2.1 Population has increased
2.2.2.2 Purchase power of people has increased. So they can afford more things.
So my point of concern is 2.2.2.2 Purchase power of people has increased.
For some reason we always look at all other factors and neglect this most important point which is ONE BIG FACTOR for inflation.
We must be having close to 2 million Software Engineers and IT enabled Services people put together. Lets assume an average salary of 5 Lakhs as their income.
Now compare this salary with say your father's salary in late 80s and early 90s. It was around Rs 5000... That amounts to Rs 60,000 per year.
We have surpassed the average salary of 90s by leaps and bounds. For a bread earning person in 80s buying a car was when he was in his early 40s and would by a house in his 50s or nearing retirement. Even at that time the price of car was still Rs 1.5 to Rs 2 Lakhs and a house would have costed a minimum of 8-10 Lakhs.
Compared to prices of items in 80s and 90s, the daily items have not kept pace with the rising salary. So the ratio of expenditure/salary has gone down drastically. So people can buy more items now.
So people have more disposable income now compared to our parents.
You may wonder whats new that I am talking about...
I am definitely not saying anything new. The point I wish to make is the following:
Because we have purchasing power, we tend to buy more items which leads to more demand and we cannot grow more vegetables and fruits. Since demand is more, the price of items also goes up. This leads to rise in inflation as essential commodity prices increase.
Now this leads to frustration among the middle class and lower middle class. So you will see that even they start demanding more. The price of your trip in a rickshaw goes up. Atrip to mysore in bus costs more. Petrol prices go up. Carrots and Onion prices go up.
Now you start feeling the pinch. You feel that prices are going up and you feel that your salary is less to sustain the lifestyle. So you feel that you should earn more. This leads to more frustration.
So what started as a great salary for you does not look like a great salary now.
So you caused the inflation.
I know you have would have upped your ante, But isnt this a fact ?
So a rising salary did not really help right (unless your rise is way higher than your peers and leaves inflation far behind).
This cycle keeps repeating every once in a while. So 1 KG of onion which used to cost say 10 Paise in 1950 would cost you Rs 5 now.
In that sense I have a iny miny twiny bit of inclanation towards the idology of the communists (and nothing more).
Bottomline:
2.2.2.2 : Inflation is rising because of rising salary. So if salaries are maintained at a particular level, expectation of people reduces.
2.2.2 : Since salary is less, consumption is reduced.
2.2 : Once consumption reduces Demand supply gap gets reduced.
2 : Once demand supply gap reduces prices fall and hence inflation reduces.
Till we have higher salaries for a section of society, it would fuel demand and hence inflation.
There are many factors for inflation:
(1) Speculation
(2) Demand supply gap which leads to higher costs, thereby rising inflation
Both these reasons inturn have many sub reasons.
Let me pick up the Second point: Demand Supply Gap
There can be 2 sub reasons for demand supply gap:
2.1 Artifically create less supply of materials by hoarding items.
2.2 There is a geniune demand supply gap.
Let Us take the Second scenario i.e. there is actully a demand supply gap.
Now this can inturn have many reasons:
2.2.1 Bad mansoon spoils crops so supply of edibles reduced.
2.2.2 Consumption has increased and supply has not grown accordingly.
Lets take the second scenario i.e. Consumption has increased
Now this inturn can be because of various reasons
2.2.2.1 Population has increased
2.2.2.2 Purchase power of people has increased. So they can afford more things.
So my point of concern is 2.2.2.2 Purchase power of people has increased.
For some reason we always look at all other factors and neglect this most important point which is ONE BIG FACTOR for inflation.
We must be having close to 2 million Software Engineers and IT enabled Services people put together. Lets assume an average salary of 5 Lakhs as their income.
Now compare this salary with say your father's salary in late 80s and early 90s. It was around Rs 5000... That amounts to Rs 60,000 per year.
We have surpassed the average salary of 90s by leaps and bounds. For a bread earning person in 80s buying a car was when he was in his early 40s and would by a house in his 50s or nearing retirement. Even at that time the price of car was still Rs 1.5 to Rs 2 Lakhs and a house would have costed a minimum of 8-10 Lakhs.
Compared to prices of items in 80s and 90s, the daily items have not kept pace with the rising salary. So the ratio of expenditure/salary has gone down drastically. So people can buy more items now.
So people have more disposable income now compared to our parents.
You may wonder whats new that I am talking about...
I am definitely not saying anything new. The point I wish to make is the following:
Because we have purchasing power, we tend to buy more items which leads to more demand and we cannot grow more vegetables and fruits. Since demand is more, the price of items also goes up. This leads to rise in inflation as essential commodity prices increase.
Now this leads to frustration among the middle class and lower middle class. So you will see that even they start demanding more. The price of your trip in a rickshaw goes up. Atrip to mysore in bus costs more. Petrol prices go up. Carrots and Onion prices go up.
Now you start feeling the pinch. You feel that prices are going up and you feel that your salary is less to sustain the lifestyle. So you feel that you should earn more. This leads to more frustration.
So what started as a great salary for you does not look like a great salary now.
So you caused the inflation.
I know you have would have upped your ante, But isnt this a fact ?
So a rising salary did not really help right (unless your rise is way higher than your peers and leaves inflation far behind).
This cycle keeps repeating every once in a while. So 1 KG of onion which used to cost say 10 Paise in 1950 would cost you Rs 5 now.
In that sense I have a iny miny twiny bit of inclanation towards the idology of the communists (and nothing more).
Bottomline:
2.2.2.2 : Inflation is rising because of rising salary. So if salaries are maintained at a particular level, expectation of people reduces.
2.2.2 : Since salary is less, consumption is reduced.
2.2 : Once consumption reduces Demand supply gap gets reduced.
2 : Once demand supply gap reduces prices fall and hence inflation reduces.
Till we have higher salaries for a section of society, it would fuel demand and hence inflation.
Labels: Financial Psychology, Inflation
posted by amitkeerti | 9:54 PM
|
1 Comments
