National Inflation And The Local Price Level

National Inflation and the Local Price Level: A Paradox

Sreeram A V

An Introduction about • Inflation is one of the most periodic Inflation

happenings, which very rarely captured the minds of the people and the media in the past. • Combating inflations is one of the most challenging ventures that a country can think of. • Consistent rise in the price, relatively for a longer period is termed as inflation.

Objective of the Paradox

• It explains about the gaining tremendous public attention as well as media coverage to its full extent. • This study analyses the possibility that the local price level depends on several other factors independent of national factors. • To justify this various countries such as Brazil, USA, etc. and states inside India were checked with their respective Inflation rates.

Inflation: The World Over • The USA and France faced the problem of inflation at the end of the 17th century due to the war of independence. • Alaska and South Africa touched alarming rates in 1848 due to discovery of gold mines in Australia. • Study conducted by Matteo and Benoit (2005) of European Central Bank and Federal Reserve Bank of Chicago revealed that inflation has largely been a global phenomenon over the last 45 years. •The study was confined to 22 countries of Organization for Economic Cooperation and Development(OECD).

the study •Exploring The study contradicts the definition, “Inflation is an international phenomenon” for the running inflation in India. • The research focuses to test whether the national rate of inflation accompany the local level price changes. • No concrete studies have been conducted specifically through finding correlation between the national inflation and the local price levels.

Inflation and Stock •Prices Numerous empirical studies establish that inflation has a negative short – run effect on the stock returns, but a few studies report a positive long – run Fisher relation. • They reveal that stock prices have a long memory with respect to shocks in goods prices, which implies investors should expect stocks to be a good inflation hedge over a long holding period.

Inflation and Unemployment

• Another study conducted by Aleksander Berentsen (2008) studied a vulnerable issue in macroeconomics: the relation between unemployment and monetary variables like inflation or nominal interest rates. •The results suggests that monetary factors may be important for labor market outcomes not only theoretically but also quantitatively.

Sample, Scope and Limitations Commodities are classified in to five major categories. oFish Items oVegetables oGroceries oFMCGs oFruit items The study has been confined to Mangalore City in Karnataka state considering the limitation that price rise is a continuos phenomenon.

Wholesale Price •WPI is the index that Index is used to measure (WPI) the change in the average price level of goods traded in wholesale market. •In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. •It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has

•CPI is a statistical time-series measure Consumer Price Index of a weighted average of prices of a (CPI) specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. •CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this

Calculation of Inflation rate: • To prove the differences between Inflation and change in price level, inflation rate is calculated. If P0 is the current average price level and  P −1  is the price level a year ago, the rate of inflation during the year might be measured as follows:

Inflation rate: The inflation rate were categorized and the values are calculated as shown below: * Fish Items= 29.74 * Vegetables = -5.48 * Groceries = 10.84 * FMCGs = 2.00 * Fruit items = 7.92

Correlation Coefficient

Formula:

Correlation(r) = where                              Scores                            

NΣXY - (ΣX)(ΣY) -----------------------------------------√ ([NΣX2 - (ΣX)2][NΣY2 - (ΣY)2])

       

N = Number of values or elements  X = First Score Y = Second Score ΣXY = Sum of the product of first and Second

       

ΣX = Sum of First Scores ΣY = Sum of Second Scores ΣX2 = Sum of square First Scores ΣY2 = Sum of square Second Scores

Interpretation • The empirical result for the

correlation coefficient is found to be 0.563 in Mangalore. •This indicates that the national inflation rate and the local level inflation can be correlated and they are positive. •The movement of national level inflation is accompanied to the extent of 56.30 % in the local level price. •If the prices are increased or decreased at the national level, the same is accompanied to the extent of half degree in the local level.

Conclusion “Inflation is misunderstood as a change in the price level in the entire country whereas the changes will affect the commodities which are included in the basket of WPI and CPI.”

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