The concept of inflation seems to be quite befuddling.

Mike Shedlock or Mish examines the different definitions and puts a case where inflation is defined as, and I quote,

The logical outcome of the above discussion is that a proper definition of inflation or deflation must be built on the foundation of a sound definition of money supply that distinguishes between money itself and credit. The definition should also ensure that the horse and the cart are in their proper places.

Inflation, he proposes, is a function of money supply and rising prices / reducing purchasing power is an effect.

From a real life street economics perspective, all this may be a bit too technical. In fact, it is this ignorance that is generally exploited by most traders. In reality, rising prices need not necessarily have anything to do with the forces of nature. It is quite possible that merchants looking to make fast money hike up their prices to take advantage of the general sentiment.

Let’s look at vegetable prices. So fuel prices are high, hence transportation costs i.e. the cost of hiring a truck to move from farm to market goes up. Fine. But let’s look at how the market is organised. Typically, the vegetable markets are organised around mandis or hubs with each hub serving a market in and around. The Nasik onion and tomato mandi for example serves Mumbai, Pune and around.

The maximum distance between mandi to any city market is about 200km. In the case of Mumbai, the trucks don’t have to come into the city. They stop at Vashi and unload from there. The vehicles used are typically LCVs / small tonnage trucks. They may or may not indulge in overloading, but the optimised fuel utilisation is more or less consistent with what is reasonably possible. The roads have become better with the whole National Highways development, meaning faster trips.

So what they pay extra in terms of fuel, they make up by having faster turnarounds, overloading and hence more trips.

So the impact of fuel price increase on the net cost of transportation and by extension on the price of vegetables is negligible. But there is a price increase? Since it does not seem to follow economic logic, there must be some illogical forces manipulating the prices.

In the case of the large retail stores, their logistics operate on the cost reduction by aggregation model. By transporting large volumes of vegetables serving multiple stores across the country, these stores get tremendous cost benefits. Yet they are also increasing prices.

Extend the same arguments to any other commodities and you will see that rising consumer prices are only partly due to “natural economic forces”. Rather sentiments are being artificially stoked for overall profit motives.

Where does one start addressing this issue?

First question to answer, who benefits most in rising prices / supply shortage situation? The answer for that is our starting point.

The second question to answer, how are prices really set? In my opinion, pricing models is an art, not a science. It is upto the imagination of the merchant. If some one wants to sell a car at Rs. 1 lakh, it is possible (and we are almost there, plus or minus 20,000).

Third question to answer, does consumer demand , habits, buying behaviour really impact prices? In my opinion, I don’t think so. There may some promotional prices like Rs. 99 or Re 1 per minute or Rs. 501 etc. As most people who have gone for such prices, they have experienced the fine print and real expenses the hard way.


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