Understanding econoMISTs- Gobbledygook

About inflation, commodities and effective substitutes, and proteins
October 28, 2010 05:27 PM |
R Balakrishnan

An article in The Wall Street Journal a couple of days ago, left me all mixed about some everyday issues

I guess one of the most essential things for someone who is always in the glare of the media, is to be articulate. Often you have to say something which sends the reader into a tizzy. For fear of sounding stupid, the reader does not ask anything.
Today, I stumbled upon an article titled, "RBI: India Experiencing Structural Food Price Shock", in The Wall Street Journal. (You can access the report at http://online.wsj.com/article/SB10001424052702303467
004575575421547641584.html .) The article reports on a speech by Reserve Bank of India governor Subir Gokarn. Each of the quotes is worth reproducing. I am not an economist, so to me the sentences were high octane economics. Here goes:

"Persistent price increases in commodities for which there are no effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time," Mr Gokarn said in a speech.

I tried to break down the sentence at different places and still ended up as confused as ever. Does this mean that when the price of something goes up, inflation happens? Or does it mean that inflation happens only when prices of commodities, of those that have no effective substitutes, go up? (Wonder what the term 'effective' substitute' means?) One brilliant sentence and the readers can enter into a debate about the meaning, context and the impact. I think what it means is that when price rises, inflation happens. Wait. Maybe it means that when prices rise, the 'rate' of inflation will go up. One thing, though, was clear. Inflation is here to stay. The only thing to wonder is why and what makes it happen. Part of the answer is in the explanation given. Inflation is because of 'persistent' price increases.

This sentence followed immediately:

"This means that actual inflation or interest rates would be higher than they would be in the absence of such increases."

The sentence is far more profound. One thought that there is more than one kind of inflation. One is 'actual' inflation referred to in this statement. The second part though should defeat a layman like me. That if the prices do not increase, the inflation or interest rates could be lower. I hope I got it right. Or, does it mean that because of prices rising, inflation is higher than what it could be without such increases? Well, I am all at sea.

The next quote is something out of this world:

"Increasing demand for protein appears to be an inevitable consequence of rising affluence. The affordability and availability of protein is an important indicator of an equitable and sustainable development with implications for both nutritional balance and macroeconomic stability," Mr Gokarn said. A powerful supply response to all sources of protein is needed, he added.

The first half is clear to me. As we Indians get richer, we want more proteins. This includes our dals and perhaps chicken. (You see, in Chennai, most shops selling chicken have the word 'protein' in their name). The next part of the sentence was a Eureka moment for me. The more of dals and chickens I have, the more prosperous my nation is! And the gentleman has drawn another interesting relationship. That affordability is not enough by itself. One should be able to lay hands on it also. And how much of dal and chicken we can have and access tells the story of how healthy we are (nutritional balance?) and how healthy our economy is (macroeconomic stability)! What deep linkages.

So, the solution lies in making available more dal and chicken to all. Sure it is not enough by itself, but proteins are an important indicator. Since I do not eat chicken regularly, I must eat more dals. That is a sign of my growth. And of course I stay healthy and the nation also remains stable.

I never knew that economics, inflation, chicken, dal and proteins were so closely linked and that they are key determinants of social and national development. And as the gentleman says, we need a powerful 'supply' response. We need a national campaign to grow more dals and hatch more eggs.