By-SUNMEET KAUR

&

GUNJAN BUDHLANI

To understand the concept and causes of inflation.

To understand the effects of inflation on the economy & on the business.

To know the buying behaviour of the consumers during the period of inflation and the strategies which are adopted by the business firms specially FMCG firms to tackle with the situation.

To know the measures taken to control the inflation

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. 

When the general price level rises, each unit of currency buys fewer goods and services.

Inflation also reflects erosion in the purchasing power of money.

Creeping Inflation

Walking or Trotting Inflation

Running Inflation

Hyper Inflation

Semi-Inflation

True Inflation

Stagflation

Sectoral Inflation

Different schools of thought provide different views on what actually causes inflation.

The general agreement amongst economists is that inflation may be caused by:

either an increase in the money supply or a

decrease in the quantity of goods being supplied.

This refers to the idea that the economy actual demands more goods and services than available.

This shortage of supply enables sellers to raise prices until equilibrium is put in place between demand and supply.

It can be summarized as "too much money chasing too few goods".

This theory states that inflation occurs when the cost of production rises and the increase is passed on to consumers.

The cost of production can rise because of rising labor costs or when the producing firm is a monopoly or oligopoly and raises prices, cost of imported raw material rises due to exchange rate changes, and external factors, such as natural calamities or an increase in the economic power of a certain country. 

Hoarding

Distortion of relative prices

Increased risk

Increase in tax bracket

Lowers national saving

Indian consumers have always been value conscious, and the inflationary environment has increased this tendency.

Indian shoppers prefer larger packs of consumer products, rather than seasonal sales in order to economise

Consumers prefer to purchase larger ‘value' packs to save.

Consumers actively seek out deals, or even switches stores to avail of deals or better value.

41% of the Indians see an advantage in shopping at value retailers, and 40% at locations close to their homes and offices.

Increase in price

a) HUL: Hiked the price of its detergent bar Surf Excel (120 g) earlier known as Rin Supreme from Rs 13 to 15.

b) Tea Companies: Tata Tea and Duncans Tea have also hiked prices for select brands in their stables.

c) Britannia: Hiked the price of its popular brand ‘Britannia NutriChoice Digestive’ from Rs 14 to 15.

Introduction of lower SKUs

Henkel: Introduced a new 400 gm pack of Henko washing powder at Rs 40 and withdrawn the 500 gm pack that used to sell for Rs 46.

Procter & Gamble: Have reduced the pack size of its flagship detergent brand ‘Tide’ from 1 kilo to 850 gm while maintaining the price point at Rs 62

Cost Cutting Strategies

a) Companies are busy in strengthening their distribution and logistics, by bringing in more efficiency and innovation in the supply chain.

b) Companies are closely monitoring their stock levels and loading patterns.

c) Soap companies have shifted to cheaper options of raw materials to source their products at a competitive price.

d) Some companies have cut down their spends on advertisement.

Restructuring to leverage synergies: With the ‘power of one’ strategy, PepsiCo is aligning its beverages and snacks businesses under a common leadership.

This will help them to maximize synergies of the two businesses across key functions such as procurement, agriculture and production, which will lead to production efficiencies.

This will help them to minimize the price

a)Monetary Measures

Monetary measures used to control inflation include:

(i) bank rate policy(ii) cash reserve ratio and(iii) open market operations.

b) Fiscal Measures

Fiscal measures to control inflation include taxation, government expenditure and public borrowings.

The government can also take some protectionist measures such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.

CPI in recent months (2011) 

Period 2011 Inflation(%)

November 9.341

October 9.392

September 10.056

August 8.989

July 8.427

June 8.621

May 8.721

April 9.412

March 8.823

February 8.823

CPI in recent years

Period Inflation(%)

November 2011 9.341

November 2010 8.333

November 2009 13.514

November 2008 10.448

November 2007 5.512

November 2006 5.950

November 2005 5.334

November 2004 4.167

November 2003 3.067

November 2002 3.602

Inflation has become a major concern worldwide in 2008, with global prices rises in oil, food, steel and other commodities being the culprit.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.

While money growth is considered to be a principal long-term determinant of inflation, non-monetary sources, such as an increase in commodity prices, have played a key role in triggering inflation in the past four decades.

Effects of inflation includes a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings.

High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future .

The credibility of inflation control policies can often be enhanced by the introduction of inflation targets.

The Indian consumers will prefer larger packs of consumer products, rather than seasonal sales in order to economise.

Time saving tactics is critical for today's time-starved shoppers, and e-tail grocery stores are slated to emerge as a viable channel for shopping as well as an important way for retailers to differentiate themselves while reducing costs.

The strategies which are adopted by the FMCG companies includes increase in the price of commodities, introduction of lower SKU’s, cost cutting strategies, mergers & acquisitions, restructuring to leverage synergies.