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Inflation and relative price variability: Evidence for India

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  • Rather, Sartaj Rasool
  • Durai, S. Raja Sethu
  • Ramachandran, M.

Abstract

This study decomposes relative price variability into a component due to inflation and a component due to real factors. The empirical results for India suggest that real factors account for 55% and inflation accounts for 45% of the variability in relative price changes. The proportion of inflation induced relative price variability increases with the rise in inflation, implying that inflation has distortionary effects on the structure of relative prices. Further, larger part of variability in the relative price changes seems to have been generated by fluctuations in the relative prices of a few commodities. The sector wise analysis shows that the major share of total relative price variability is contributed by fluctuations in the prices of manufactured products. The more crucial inference that emerges from the empirical analysis is that the inflation rate at which variability of relative price changes is minimum is found to be 4.5%, which is consistent with the official threshold rate often claimed by the Reserve Bank of India.

Suggested Citation

  • Rather, Sartaj Rasool & Durai, S. Raja Sethu & Ramachandran, M., 2014. "Inflation and relative price variability: Evidence for India," Journal of Asian Economics, Elsevier, vol. 30(C), pages 32-41.
    • Handle: RePEc:eee:asieco:v:30:y:2014:i:c:p:32-41
    DOI: 10.1016/j.asieco.2013.12.002
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    Cited by:

    1. Sartaj Rasool Rather & Sunil Paul & S. Raja Sethu Durai, 2015. "Inflation forecasting and the distribution of price changes," Economics Bulletin, AccessEcon, vol. 35(1), pages 226-232.
    2. Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2015. "Inflation and the Dispersion of Component Price Indices: A Case for Four Percent Solution," Working Papers 2015-134, Madras School of Economics,Chennai,India.
    3. Sartaj Rasool Rather & Raja Sethu Durai & Muthia Ramachandran, 2018. "Inflation and the Dispersion of Relative Prices: A Case for 4 % Solution," Australian Economic Papers, Wiley Blackwell, vol. 57(1), pages 81-91, March.

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    More about this item

    Keywords

    Relative price variability; Decomposition analysis; Minimum-variance inflation rate;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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