Every country’s economy has to deal with inflation over time. Prices gradually go up, and, ideally, wages go up in a comparable way. However, India’s inflation rate is currently far higher than what it should be. And a significant portion of the problem is hidden beneath the surface – a fact that may be a useful lesson for Americans.
An economy’s average inflation rate is calculated with a Consumer Price Index, India’s as well as ours. Experts look at a basket of commonly used household items, such as eggs, milk, bread, clothing, medical expenses, housing, fuel/transportation, and more. Then they examine the amounts by which each of those items has risen in price over a given period of time (usually every month), and average them together. The resulting figure provides an adequate benchmark by which to measure the amount of inflation people are currently enduring, and how it compares to past CPI levels.
India has been suffering from high rates of inflation for several years now. However, last year, the Reserve Bank of India released data showing that the current CPI was just 3.76%, the lowest it’s been in a long time. But that just reflects the average of all prices. Many individual items are still going up much faster than that.
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Reasons for Inflation
Food, in particular, is skyrocketing. The price of milk increased by 7%, while other common food items went up by as much as 22%. Interestingly enough, crop production has actually been increasing in India over the last few years. However, poor methods of harvesting, transportation, and distribution often result in an inordinate amount of waste, which lowers the overall supply of these foods and drives prices up.
Fuel prices have also remained higher than they should. Even though the cost of crude oil has been largely going down around the world, the price at the pump in India hasn’t reflected this. And high oil prices also tend to be a contributing factor to a higher cost of food. The gas needed to run the machines and vehicles used in farming, as well as the trucks used to transport food from one place to another, both contribute to production costs. So when fuel is more expensive, it cuts into the bottom line.
Some of the other contributing factors to India’s inflation include hospitals and schools. Indian healthcare’s inflation rate is around 5%, while education is at 7%, both above the total CPI. The price of services is increasing faster than anticipated as well. This is a very important issue, as services make up a full 2/3 of India’s economy.
What This Means for You
What does India’s inflation rate have to do with the economy of the United States? The two are actually quite closely connected. Many U.S. corporations farm out various aspects of their business to India, from manufacturing to customer service and more. In fact, it’s the number one country for outsourcing in the world, ahead of China and Malaysia.
Companies outsource their work to other countries because it’s cheaper, and with India’s total CPI being lower than expected it’s doubtful that many will see a reason to go anywhere else. But as many individual items and areas continue to experience large rises in prices, it will steadily make the cost of doing business in India higher—particularly for service-based fields, like over-the-phone tech support.
Over time, as more businesses feel the effects of India’s inflation, the ripples will carry over to consumers in the United States. It could increase our own inflation rate as prices go up to compensate for production costs. It may also have a negative impact on the stock market, as these augmented expenses lead to lower profits.
This also underlines is what makes gold such an important investment for the future; it’s not subject to the same inflation that cash is, thus it maintains its buying power over time. It also doesn’t fluctuate wildly with the stock market, but remains a safe haven, going up in value steadily and keeping your nest egg secure. If you don’t want to suffer the ill effects of spillover from other nations’ economic turmoil, then make sure your investments are in a stable tangible like gold, before it’s too late.