Inflation and Its Impact on Common Man

Stock prices, interesting analysis, macro trends and the direction and impact of policies are some of the thoughts that go through my mind when I am on my way back from the office.

On some days, I take a road that has huts and poorly maintained shanties. Sitting in my car at the traffic signal, I can see half naked children play outside these huts; the women cook on the road, and men come back from their daily labor, rest by sitting down or lying on cots. Someone told me that these people are from Bangladesh.

The plight of migrants currently moving across Europe or in Myanmar, or the migrants from Bangladesh must all be the same. They are homeless, have unstable income, lack nourishment and face myriad other day to day issues which appear trivial to the people moving around them in cars; ranging from the Nano to the BMW.

The plight of the poor could be the same as that of the migrants.

Does monetary policy impact them?

As a country we have a choice to make, we can either improve the plight of the poor as we try to grow, or leave them behind and run the risk of violent upheavals at a later date. While all the economic agenda of job creation, providing infrastructure, education and health are important- the most important one appears to be the price of food and the general level of inflation.

Inflation hurts everyone, but it impacts the poor the most. Their erratic earnings are not indexed to inflation. This creates a huge disparity in the income and wealth levels of different sections of the society and sets the country up for potential problems at a later date.

The saver demands higher interest rates, while the borrower demands lower interest rates. The poor are neither in a position to borrow from the organized channels nor in a position to save. The businessman passes on the higher prices in his business to the consumers, and the overall income gets redistributed in favor of the rich, the business class and some salaried employees whose income is indexed to inflation. The poor become poorer.

While high interest rates may slow down the pace of economic growth, it is a much better way to grow, than to have low interest rates fuelling inflation.
The central bank therefore has to take steps to bring down the inflation.

Inflation is a demon that needs to be constantly watched, and central banks should take steps to slay it.

With decline in commodity prices, inflation has been low- it is nevertheless there. A 5% inflation at the retail level means prices of goods used daily have gone up with or without commensurate increase in income.

The central bank will look at a variety a data to decide on the course of the monetary policy and probably that trend in inflation is the key data that they look out for. Economists and businessmen will ask for lower rates to bolster growth. But I hope this kind of growth does not lead to inflation. With the RBI meeting for its 5^th bi-monthly monetary policy review tomorrow we look forward to what they have to say. However our Fixed Income Head – Mr. Murthy Nagarajan believes that there will be no major change this time around in the key rates. Stay tuned for our next communication where we would update you on the same.

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Above article is authored by Quantum.

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