Per capita Income /Consumption and Inflation:

Per capita income means how much each individual receives, in monetary terms, of the yearly income generated in the country. This is what each citizen is to receive if the yearly national income is divided equally among everyone.

It has several weaknesses as a measurement. Economic activity that does not result in monetary income, such as services provided within the family, or for barter, are usually not counted. The importance of these services will vary widely between different economies, both between countries and among different groups within a country. Per capita income gives no indication of the distribution of that income within the country.

A small wealthy class in a country can increase the measured per-capita income far above that of the majority of the population ( Countries with autocratic rulers who alongwith their coterie live in unimaginable luxury while a large section of the people may be wallowing in poverty ).

Then again there is the India syndrome wherein the economic growth has virtually bye-passed the poor. In such a case the increase in per capita income has been virtually usurped by the middle and upper classes.

Most of the analysis and reporting on this subject are off the mark:




· E.g., Spokesmen of various industries quote the per capita consumption of this or that item in various industrially developed countries with particular mention to the position obtained in USA. And then lament at the poor record of India and measures required to catch up with USA. Various questions arise. Should we just copy their example when many in those countries are questioning the wisdom of wasteful consumption in those countries, depleting the world resources at a fast pace. Increasing consumption of all items is becoming the order of the day in those countries. Want is being slowly replaced by greed. ‘ live like the Joneses ‘ is the credo. There is mad rush to earn more to buy ( and waste ) more.
· The second misnomer is pattern of consumption. ‘ They are consuming so much of liquor, cigarettes, medicines, meat ‘ – we have to go far to catch up with them. Why catch up at all. Per capita consumption of wool in India is only so many meters whereas…..’ tongue in cheek statement, because India being essentially a tropical country two thirds of the population do not require any woolen cloths.

INFLATION

· Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
· Inflation can also be described as a decline in the real value of money—a loss of purchasing power. When the general price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time
· Inflation can cause adverse effects on the economy. For example, uncertainty about future inflation may discourage investment and saving. Inflation may widen an income gap between those with fixed incomes and those with variable incomes. High inflation may lead to shortages of goods as consumers begin hoarding them out of concern their prices will increase in the future.
· Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. The consensus view is that a sustained period of inflation is caused when money supply increases faster than the growth in productivity in the economy.
· The term "inflation" usually refers to a measured rise in a broad price index that represents the overall level of prices in goods and services in the economy. Consumer Price Index (CPI) Related economic concepts include: deflation, a fall in the general price level; disinflation, a decrease in the rate of inflation; hyperinflation, an out-of-control inflationary spiral; stagflation, a combination of inflation, slow economic growth and rising unemployment; and reflation, which is an attempt to raise the general level of prices to counteract deflationary pressures. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer. The inflation rate is the percentage rate of change of a price index over time.
· For example, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula

for calculating the annual percentage rate inflation in the CPI over the course of 2007 is
· The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007. Other widely used price indices for calculating price inflation include the following:
· Cost-of-living indices (COLI) are indices similar to the CPI which are often used to adjust fixed incomes and contractual incomes to maintain the real value of those incomes
· Measuring inflation in an economy requires objective means of differentiating changes in nominal prices on a common set of goods and services, and distinguishing them from those price shifts resulting from changes in value such as volume, quality, or performance. To measure overall inflation, the price change of a large "basket" of representative goods and services is measured. This is the purpose of a price index, which is the combined price of a "basket" of many goods and services.
· The effect of inflation is not distributed evenly, and as a consequence there are hidden costs to some and benefits to others from this decrease in purchasing power. For example, with inflation lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments.
· High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in

order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates.
· With high inflation, purchasing power is redistributed from those on fixed incomes such as pensioners towards those with variable incomes whose earnings may better keep pace with the inflation. This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, rising inflation in one economy will cause its exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.
· Cost-push inflation: Rising inflation can prompt trade unions to demand higher wages, to keep up with consumer prices. Rising wages in turn can help fuel inflation. In the case of collective bargaining, wages will be set as a factor of price expectations, which will be higher when inflation has an upward trend. This can cause a wage spiral. In a sense, inflation begets further inflationary expectations.
· Inflation erodes the real value of nominally fixed payments - The real value of fixed nominal payments (like rents, pensions, wages, interest, and taxes) are eroded by inflation. In many countries, such payments are adjusted for inflation on an annual basis.
Controlling inflation
· A variety of methods have been used in attempts to control inflation.
Monetary policy.
· Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping the federal funds lending rate at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum.
· High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation.
· Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.
· It is obvious that inflaion affects the poor more than the middle class and rich people. Hence the concern of Government at the inflation level at any time.

Yet these three yardsticks are quoted ad nausea by the fourth estate, businessmen and economists. Production/consumption has been equated with happiness. Equitable distribution
of goods produced should be the first priority. Containing inflation has to be the second priority. And curbing greed ( in consumption ) has to be the goal.



**