Inflation in India: How a Detergent Can Help RBI Speed Up Inflation
Laundry detergent prices rose 20% in January. While this is rarely the news when most everyday things are becoming ubiquitous, the interesting part is the retail price before the change: 10 rupees (13 US cents) for a bar.
These small bars of detergent are aimed at less affluent consumers who often can’t afford to spend more than a rupee on something else. To prevent these customers from turning to cheaper products, Unilever Plc’s India franchise relies on “magic price points” – such as 5 or 10 rupees – to help shoppers stay within their tight budgets.
“About 30% of our business comes from packs that work at the magic price point,” Ritesh Tiwari, chief financial officer of the Indian unit, said in a December quarterly earnings call. For these packs, the firm’s preferred mode is price reduction. “As a result, even selling the same number of units reduces the volume,” he said.
That is why Unilever’s 11% increase in sales in India in the last three months of 2021 is largely due to price increases. The underlying volume – the goods going out of the factory door – increased by only 2%. Rivals have done worse. According to NielsenIQ, volumes in India’s larger consumer industry declined, with rural areas recording a 4.8% decline, compared to a 0.8% decline in cities.
As India’s largest consumer business, Unilever has been able to walk a tough path between quantity and price. But then the cost of goods becomes too intense to maintain the illusion of purchasing power. So, the January bump, when the Rs 10 Self Excel bar was marked up to Rs 12, and the cheap Wheel brand detergent powder saw that its price has gone up by Rs 1 to Rs 31 per kg.
This surrender of some small packs to non-magical value – plus 41 references to “inflation” in that quarterly earnings call – should have given the RBI a warning: the dam is breaking; Costs on the profitability of large corporations were too much for them to observe the beauties of consumer psychology.
Nevertheless, to delay what appeared to be an inevitable rise in interest rates, the RBI stepped in and pegged inflation at 4.5% for the fiscal year ending March next year. That was in February. The first rate increase – a 40 basis point move – came on May 4 ৷ By then, India’s inflation problem was already frozen, and getting worse Last month, a 500-ml pouch of Vim Dish Washing Liquid went from Rs 1 less to Rs 100 more than the Rs 100 magic price.
Pranjul Bhandari, an Indian economist at HSBC Holdings PLC in Mumbai, estimates that almost half of the increase in input costs in the last six months has gone to output prices. In rural areas where uncontrolled prices of kerosene and bulk diesel have risen faster than regulated prices of electricity in cities, the cost is pass-through faster. “As electricity tariffs increase in the next 12 months, the urban cost of production and livelihoods could be hurt by the increase.”
Not just electricity. The demand for services is still trying to catch up with the pre-epidemic level. As the ongoing recovery in communication-based industries such as travel continues, they will overcome some of their own spending pressures by mimicking the strategies of consumer goods companies. Add expensive food to this list, and it’s not clear that April’s 7.8% inflation rate will return to 4% – the midpoint of the central bank’s tolerance range – anytime soon. It blurs the vision of how high India’s interest rates should go and how much should be sacrificed to increase output.
What Unilever calls its magic price point,
., A domestic manufacturer of hair oil and honey, described as “terrified”, Bloomberg News reported Friday. When companies lose weight to keep prices down, they also expect consumers to return more often. That doesn’t always happen.
Working at the Magic Price Point is like running a high-school test on “titration”, dropping a liquid of a known feature to another unknown concentration and turning it off when it changes color. Unlike any substance in the lab, the consumer is an active participant in this experiment. In a country where the average household income is less than about $ 2,300, only 10% -15% of the total expenditure, a large number of people will be very aware of the “money spent” Limited ”
Income call chairman Sanjeev Mehta said.
At 8.3%, inflation in the United States is also stubborn, but there is at least 3.6% unemployment and rising hourly earnings. According to the Center for Monitoring Indian Economy, employment in India increased by 7 million in April alone, after a sharp decline of 10 million in the previous three months. Of the 900 million who are eligible to work, only two-fifths are employed or looking for a job.
Perhaps the central bank wanted to restore a strong labor market before raising interest rates. But at least in January – a month before the start of the Ukraine war – there were alarming signs of its magical value. Now it has to work harder, to kill inflation and compensate for losing its credibility.
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