Spoiler Alert: This blog trivializes inflation
Five years back, when inflation crossed the 8% mark for the first time, an interviewer asked my opinion about the negative real returns (actual return minus inflation rate) on government bonds. As a typical amateur I answered that it is a temporary phenomenon and will get corrected over a period of time. But time has proved me wrong. UPA II has ensured a negative real return throughout its term till date. But wait. This blog is not about bashing UPA II.
Economists have been debating about the causes of such prolonged high inflation. Shortlisted culprits include supply side issues, global economic crisis, poor monetary policy and mere inability of government. But, I, sticking to my reputation of a weird thinker, have started suspecting another accused, the chillar (minor units of currency) or the lack of it.
You find it funny? I found it funny too. But let us look at these facts. You find prices of many products quoted at round figures and when they are increased, they are increased to the next round figure. When I walk in the market today, I noticed 250 gms of vegetables quoted at Rs.10, 12, 15, 20 and so on. You don't get to notice anything quoted at Rs.11,13 or 14. Why? Contrast this with countries with low inflation. You perhaps still find non-round figure prices being quoted. For instance, in UK (inflation has been lower than 5% for long), I remember a chewing gum pack costed 97p. Back then it took me a while to believe that prices can also be of such denomination.
And how does this affect inflation. Look at this. My favorite vada pav stall increased its price from Rs.10 directly to Rs.12. Another stall increased price of a snack directly from Rs.15 to Rs.20. You ask them why and the answer is that prices have gone up. But even if they face cost pressure of 5%, they are forced to increase the price significantly higher. He cannot increase the price of a Rs.10 product to Rs.10.50 or Rs.11 for lack of availability of change. And even I find it better to pay these round amounts. After all, in today's scenario if a vendor asks me to pay 50p or Re.1, I would perhaps have to seek help from a numismatist.
When price increases by Rs.2 instead of 50p, the Rs.1.50 doesn't sound big but it directly pinches my snack budget by an additional 15% . Add to this similar rises in all other costs (example: my land lord prefers to increase rent by Rs.2,000 instead of Rs.1,300 because it just isn't round) and my monthly expenses is already higher by 20% when it could have very well been just, say 13%. Thanks to rounding off.
Perhaps part of the onus of controlling inflation should be put on the government mint (to produce lower denomination coins) and not just on RBI (to manage monetary policy)
