Tomato Prices have gone up by 100%, Onion Prices are up by 150%! Inflation is so high!
Inflation or ‘mahangai’ is a very important topic in an Indian’s life. Many times, it becomes an icebreaker in conversations – “Petrol has become so expensive, matter of time before it crosses 100?”. Remember the dialogue from 3 Idiots where Sharman Joshi’s mother says that ‘now Paneer would be sold in packets by a jeweler?’
Or when recently tomato prices had gone off the roof, there were hilarious memes circulated on social media. Here’s one of them :
Inflation affects everyone. That’s why when prices of goods like petrol, veggies, cereals and pulses go up, there is a lot of hue and cry. A high inflation can also affect your Home Loan EMIs. Higher inflation leads to higher interest rates and affects everyone who has taken loans. Elections are sometimes won or lost on inflation.
But headlines don’t always reveal the actual status of inflation. The nuances get hidden beneath the headlines. Just one or two goods having high inflation may not mean that the overall inflation is high.
So let me break it up for you as to how Inflation is computed. The Consumer Price Index or CPI (formal name of Retail inflation) is constituted of various goods and services that households consume and they have a certain weight attached to it.
Did you know?
- 460 items go into calculating CPI! 😲
- Potatoes 🥔 / Onions 🧅 / Tomatoes 🍅 (POT) have a weight of only 0.98%/ 0.64%/ 0.57% in the CPI
In this table below, you can see the major components and their weights that go in the calculation of CPI. These weights are broken down into Rural & Urban because the expense patterns are different. Do note that this weight is an average calculated by the government and the actual expense patterns of each household can be quite different.
There is a big caveat to this basket of constituents. The CPI weights have been set in 2012 and we have not seen any revision since then. It is very much likely that our % spend on food has decreased and our % spend on new age items like phones, internet, tourism, etc. have increased. Unlike developed economies like US, UK, Japan where the basket of goods gets revised every few years, in India, that is not the case.
So, coming back to the first question – How tomatoes affect investments? Usually, vegetable inflation is temporary. It spikes up when there is low supply and then cools back off. So, RBI doesn’t get too worried about vegetable inflation. But if it doesn’t cool off, then this inflation may spill on to other items. This can then create a cycle where the total inflation goes up leading to an increase in Interest rates. High interest rates are not good for borrowers, but they are good for savers. This then becomes an excellent time to lock in your investments in Debt securities like Mutual Funds or Bonds or deposits at higher rates.
Inflation is not a topic that can be concluded in just one newsletter. This is a vast and unending topic. I’m sure that after reading this, you may have many more queries, so feel free to reply to this email with your thoughts.
I do hope you enjoyed reading this, and until next time,
Happy Investing,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
