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  • Why is inflation missing? Blame it on Patanjali and robotification

    Article by Rajeev Thakkar in The Economic Times, August 15, 2017

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    Low unemployment rates would typically warrant an increase in interest rates.

    Central banks the world over are confused. The US Federal Reserve wants to increase rates and suck out liquidity that was put in at the time of the financial crisis.

    Growth and employment are doing fine and low unemployment rates would typically warrant an increase in interest rates. However, inflation is quite low and they are concerned that tightening too much or too soon would hurt the economic recovery.

    In India, RBI has also been struggling. While the government and industry and mortgage lenders have been clamouring for lower interest rates, RBI has been cutting rates at a reluctant pace. In the opinion of many, it seems to be behind the curve and inflation has been surprising on the downside rather than the upside.

    So, what explains the missing inflation? Has the monster been slain?

    I am no economist and I will leave aside macro economics. My area of interest in the inflation piece is from the business and consumer side, and here are my two bits on this subject.

    Patanjali and Amazoning of inflation

    One phenomenon that has been seen on the business side is that things that were seen to be creating entry barriers/ pricing power/ moats are no longer seen as such. Brand power, distribution reach and scale were seen as a huge advantage for incumbents and insurmountable barriers to new entrants.

    Various challenger brands from entities like Cavinkare, Vini Cosmetics, Patanjali have proved that the moats around the castles of consumer products companies are not insurmountable. Similar has been the experience of say upstart mobile phone brands.

    Another factor which is eroding the pricing power of companies has been in-store brands/ private labels of both online and offline retailers such as Amazon and Future Group.

    Given these trends, businesses have been reluctant to increase prices of products that they sell.

    China, Australia and West Asia effect on inflation

    For a good part of the decade 2000-2010, there was a lot of demand shock on various commodities ranging from oil to iron ore. Supply was catching up with demand constantly. Finally, it seems overcapacity has caught up with most commodities. Barring a big supply shock from some geopolitical event, commodity-led inflation seems to be behind us.

    Robotification of inflation

    Introduction of robots is not new. One can argue that an ATM machine is a robot that does the work of a teller/cashier. With the increased use of technology, it is difficult for the workforce to demand regular and large pay increases. If there are demands for pay increases, businesses start evaluating automation of those functions.

    Given the increasing use of technology and globalisation where work quickly moves to low-cost locations, it may be difficult for wage-led inflation to make a quick comeback.

    "The reports of death are greatly exaggerated"

    Mark Twain is supposed to have quipped this to a reporter when he was informed of rumours circulating about his death. It may well be the case with inflation.

    So where is inflation thriving?

    Premium offerings

    While the headline inflation numbers do not reflect this, there has been a large reduction in basic offerings by companies and service providers and an increase in premium offerings. This does not reflect in inflation calculation by statisticians but the pinch is felt by consumers.

    Examples

    A single screen theatre is pulled down and replaced by a multiplex. The movie ticket price goes up from ?75 to ?300. This does not count as inflation as the quality is different.

    A Udipi restaurant closes down and is replaced by an air-conditioned big brand coffee shop. The quality and experience is different, but one does not have a choice of availing of the previous offering.

    Healthcare

    Here private healthcare is replacing government healthcare and costs relating to hospital stays, surgeries do not find their way into the published inflation statistics.

    Education

    In education again, it is a story of private education replacing government-funded schools. While a modern ICSE/ CBSE/ IB school is not strictly comparable with the old government-funded SSC school, in many cases, the supply of the old format schooling has shrunk or has deteriorated in quality so that the impact on household budgets is more or less unavoidable.

    Asset inflation

    An area where the inflation impact is clear is on various asset classes ranging from bonds to equities to stocks to private businesses. Low interest rates and ample liquidity have lifted all boats of various assets.

    In conclusion, it remains to be seen whether inflation is vanquished or is merely recuperating to make a comeback and fight another day.

    The original article could be seen here.

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