IMPACT OF INFLATION ON CONSUMPTION PATTERN

By

Debdoot Mukherjee, Forline De Fernanddo.X, Nagaraj P, Sarica.S, Dinesh Varma.M, Eveson Chella,

Karin Basha, Parul Mukherjee, R.Jayanandhini, & Pavan

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CONTENTS

A. ACKNOWLEDGMENT ……………………………………….. 3

1. INTRODUCTION

1.1. CONTEXT…………………………………………………. 4

2. OBJECTIVES………………………………………………………. 6

3. SCOPE OF THE RESEARCH……………………………………... 6

4. LIMITATIONS OF THE STUDY…………………………………. 7

5. METHODOLOGY…………………………………………………. 8

6. REVIEW OF LITERATURE………………………………………. 9

7. DATA ANALYSIS

7.1. PRIMARY DATA ………………………………………… 12

7.2. INFLATION GRAPH ……………………………………. 19

8. ESTIMATED IMPACT OF INFLATION CONSUMPTION PATTERN

8.1. WHO ARE AT RISK? .......................................................... 20

9. FINDINGS AND CONCLUSIONS………………………………… 21

10. SURVEY QUESTION……………………………………………… 22

11. REFERENCES……………………………………………………… 24

12. APPENDIX………………………………………………………… 25

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ACKNOWLEDGEMENT

We owe a great many thanks to a great many people who helped and supported us during the

project.

Our deepest thanks to Lecturer,

Prof. G.SHARADA

The Guide of the project for guiding and correcting various documents of mine with attention

and care. She has taken pain to go through the project and make necessary correction as and

when needed. I express my thanks to the Director of ITM Chennai, for extending her support.

We would also thank Our Institution and my faculty members without whom this project would

have been a distant reality. I also extend our heartfelt thanks to our well-wishers.

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1. INTRODUCTION1.1. Context

In India, last two decades have recorded substantial economic growth and

improvements in livelihood among urban populations. High rate of development and

urbanization results in the increase of middle class. Currently India has 31.4 million

middle class households which represent 13 percent of India’s population. The

percentage of middle class in the country’s total population will increase to 20.3 percent

by 2015 and 37.2 percent by 2025 i.e. the number of middle class households in India is

likely to more than double from the 2015-16 levels to 113.8 million households or 547

million individuals. As per the study, which uses 'household income' as the criterion, a

family with an annual income between Rs 3.4 lakh to Rs 17 lakh (at 2009-10 price levels)

falls in the middle class category. The middle class in low and medium income

economies in the world is increasingly demanding higher value agricultural produce and

due to supply constraint the price of commodity increases.

Inflation is the persistent rise in the general price level of the commodity. Opinion

survey in India reveals that inflation is the most important concern of the middle class

people and it badly affects their standard of living and consumption. Inflation in food, by

its very nature is the enemy of middle class consumers. These categories of people have

to fight every day for their survival in metro cities as the cost of living is very high. Food

inflation indicates higher prices of agricultural products. The primary articles contribute

to 20.118% and food articles contribute to 14.337 % in Wholesale Price Index as per the

WPI series 2004-05.

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Inflation on Food Price Index (April 2004-December 2010)

Source: Ministry of Commerce and Industry

The increase in food prices is not homogeneous. The cereal prices (rice and wheat particularly)

have increased quickly since 2006: monthly inflation rate is higher than 5% for wheat and rice

(except for few months). The increase in cereal prices was higher than the increase in food prices

before the beginning of 2009; after food prices have risen more quickly. In last quarter (from

November 2010 to January 2011), wheat price decreased but this decrease didn't set the past

increase.

It is well-known that people are adversely affected by rising food prices which limit their

purchasing power. In order to develop efficient policies to fight the negative impact of rising

food prices, it is necessary to know which households are the most vulnerable, how food

inflation affects them.

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2. OBJECTIVE

Primary data

To study the impact of inflation on consumption pattern.

SECONDARY DATA

To explore the various issues related to food inflation and consumption

pattern of the household.

To understand the degree of impact of food inflation on middle class

consumers.

3. SCOPE OF THE RESEARCH

This research will help us to find out the impact of inflation on consumption

pattern

Rise to scope for research in it gives impact of inflation on consumption

pattern particularly with respect to middle class consumers.

This research is conducted in urban area; it can be extended further to rural

areas of the country.

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4. LIMITATIONS OF THE STUDY

The research is limited to the certain part of Chennai city.

The data collected may not be sufficient to depict the real picture of the

consumption pattern in middle class.

The study is based on subjective opinions of the respondents and their

participation.

Due to time constraint it couldn’t possible to cover all the aspects.

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5. METHODOLOGY

Primary data collection

The present study is interdisciplinary (socio-economic); the data has been collected from

secondary as well as from primary source. The secondary data comprises various references

which already existed in the published form such as research papers, articles relating to food

inflations or books and websites for the review purpose. Selection of the papers is done on the

basis of their relevance and contribution to the body of knowledge. A sample size of 100

households has been drawn randomly from the population of Egmore, Nungambakkam,

Navalur, Thoraipakkam, Thiruvanmiyur in Chennai. We conducted a survey among the

middle class and lower class population of Chennai city and filled up the questionnaire from the

head of the family through structured interviews. During the survey the class consumers were

categorized on the basis of their household income.

S.No Income Level Class

01 More than 7 lakh/per annum High income group

02 2.2 lakh to 6.9 lakh/per annum Middle income group

03 Less than 2.1 lakh Lower income group

People’s daily consumption pattern was also surveyed. And suggestion about inflation in the rate

of commodities were asked to the people so as to view their different opinions.

Secondary Data Collection:

The secondary data comprises various references which already existed in the

published form such as research papers, articles relating to inflation in consumer goods and also

in books and websites.

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6. REVIEW OF LITERATURE

However number of studies has been conducted in the form of surveys and research work

done on food inflation. An attempt has been made by the researcher to understand and

acknowledge the work of various researchers in the field of food inflation and

consumption.

1. INFLATION

In economics, 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. Consequently, inflation also reflects an erosion in

the purchasing power of money – a loss of real value in the internal medium of exchange

and unit of account in the economy. A chief measure of price inflation is the inflation

rate, the annualized percentage change in a general price index (normally the Consumer

Price Index) over time.

2. IMPACT OF INFLATION

Inflation's effects on an economy are various and can be

simultaneously positive and negative. Negative effects of inflation include a decrease in

the real value of money and other monetary items over time, uncertainty over future

inflation which may discourage investment and savings, and if inflation is rapid enough,

shortages of goods as consumers begin hoarding out of concern that prices will increase

in the future. Positive effects include ensuring that central banks can adjust nominal

interest rates (intended to mitigate recessions) and encouraging investment in non-

monetary capital projects.

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 low to

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

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such as during scarcities, as well as to growth in the money supply. However, the

consensus view is that a long sustained period of inflation is caused by money supply

growing faster than the rate of economic growth.

Today, most economists favor a low, steady rate of inflation. Low (as opposed to zero

or negative) inflation reduces the severity of economic recessions by enabling the labor

market to adjust more quickly in a downturn, and reduces the risk that a liquidity

trap prevents monetary policy from stabilizing the economy. The task of keeping the rate

of inflation low and stable is usually given to monetary authorities. Generally, these

monetary authorities are the central banks that control monetary policy through the

setting of interest rates, through open market operations, and through the setting of

banking reserve requirements.

Increasing trend in primary food articles:

Source: NSSO Surveys Decade wise average inflation

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DEMAND AND SUPPLY OF MAIN COMMODITIES

The food grains production has increased at the rate of 2.68 per cent per annum during 1960-

1999 which was mainly because of productivity growth (2.44%).

The share of superior cereals (rice and wheat) in total food grains production has shown an

increasing trend whereas the share of coarse cereals and pulses has shown a declining trend

during the last four decades. The study further reveals that the per capita cereal consumption

showed a declining trend in both the rural as well as in the urban areas. The total per capita

monthly consumption expenditure has increased by about six and seven times in rural and urban

areas, respectively during this period.

However, the expenditure on food items exhibited a declining trend during this period. The food

basket was found to be diversified both in rural and urban areas with higher levels of per capita

consumption expenditure on milk and milk products, fruits and vegetables and meat. A deficit of

about 9 million tonnes of cereals is expected by 2009-10 but by 2029-30, India is expected to

emerge as a surplus nation in cereals production. Pulses show a deficit of about 5 million tonnes

in 2009-10 and quantum of deficit is expected to increase gradually to the extent of about 14

million tonnes by 2029-30. With the estimated food grains production there is no danger to food

security but the estimated production can be achieved mainly through improvement in

productivity. A high rate of increase in productivity calls for a priority in agricultural research

system coupled with more capital investment stressing the development of new production

technologies for main crops and farm products.

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7. DATA ANALYSIS

7.1. Primary data

After collecting the primary data from the population of Chennai on the basis of questionnaire filled up by the head of the family. The following results come out.

Graph 1

Joint family Nuclear family0

10

20

30

40

50

60

70

80

26

74

Type of house hold

Type of house hold

Source: Survey data Type of house hold

Analysis: - From this graph we can say that majority of the house hold are nuclear

families.

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Graph-2

77%

22%1%

Occupation

Service Business Agriculture Unemployed

Source: Survey data Occupation of the Household

Analysis: - From this graph we came to know that 77% of household are service people.

22% are business people 1% is agriculture. Service household are again categorized into

two type government services and private service 23% of house hold are in government

sector and 54% are in private sector.

Table 1

Particular Assets Percentage

Household assets

Television 100%

Motorcycle/scooter 100%

Four-wheeler vehicle 55%

Owned house 100

Source: Survey data

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Analysis: - From this table we come to know that majority of the income group has all

the main house hold assets only the Lower income group do not afford to have

four – wheeler vehicle.

Graph 3

310

20

67

What is your household income per month

below 50005000-1000010000-20000above 20000

Source: Survey data Analysis: - From the above graph we come to know that 67% of the incomes of house

hold lies above 20000 per month. Whereas 20% lies between 10000-20000per month,

and 10 % lies between 5000-10000per month. Income group only 3 % lies below 5000

income per month.

Table2

Particular Commodities No of Househol

d

Average Quantity / Household

COMMODITIES FOR DAILY CONSUMPTION

Rice 100 21 KgWheat 100 5 KgPulses 100 4 KgOil Refine 67

4 LtsMustard Oil 10Palm oil 20Castor oil 3

Sugar 100 3 Kg

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Source: Survey data

Analysis: - From the above Table we come to know that all the house hold income

group consume all the basic commodities for their daily use.

Graph 4

Before Inflation After inflation

Rice 30 38

Wheat 25 34

Pulses 65 78

Oil 62 75

Sugar 35 40

5

15

25

35

45

55

65

75

85

3038

2534

65

78

62

75

3540

RiceWheatPulsesOilSugar

An Average Household Spend on Monthly Commodities* (in terms of money)

Source: Survey data * Rs per Kg

Graph 5

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Before Inflation After inflation

Rice 21 21

Wheat 5 5

Pulses 4 4

Oil 4 4

Sugar 3 3

2.5

7.5

12.5

17.5

22.5 21 21

5 54 44 43 3

RiceWheatPulsesOilSugar

An Average Household Spend on Monthly Commodities* (in terms of Kg )

Source: Survey data

Analysis: - From the above graph no 4 & 5 we came to know that there is a huge change

in price of commodity but the consumption pattern did not change. They have adapted to

the change in price of commodity. The average number of house hold consume same

amount of commodities that they use to consume before inflation.

Table 3

PARTICULAR ITEMS CONSUME

LOWER INCOME GROUP MIDDLE INCOME GROUP

How frequently did an

average family consume

the following items?

Vegetables Daily Daily

Milk Daily Daily

Fruits Weekly Daily

Eggs Weekly Daily

Meat / Fish Weekly Weekly

Source: Survey data Consumption Pattern of Selected Commodities

Analysis :- From the above table 3 we came to know that middle income group consume

all the secondary item in a daily manner except meat and fish whereas the lower income

group consume vegetable and milk in daily manner and rest in weekly manner.

Graph 5

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8

Did increase in food price affect your monthly saving

YesNo

Source: Survey data Change In Savings

Analysis :- From the above Graph 5 we came to know that yes there is a change in monthly saving in all the income group.

Graph 6

97

3

Does everyone in your household get at least three meals a day throughout the year

YesNo

Source: Survey data Household Get At Least Three Meals

A Day throughout the Year

Analysis: - From the above Graph 6 we came to know that yes the average house hold gets the three meals a day throughout the year.

Graph 7

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3.2

Does your household have a Ration Card

YesNo

Source: Survey data Ration In House Hold

Analysis:- From the above Graph 7 we came to know that majority of the household have a ration card

Graph 8

27

73

Do you use ration card to get monthly com

YesNo

Source: Survey data Use of ration card

Analysis :- From the above Graph 7 we came to know that majority of the house hold do not use the ration card as because they do not get anything from the ration. And even if they get something the quality of the commodities is not up to the mark.

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7.2. INFLATION GRAPH

Graph 9

JAN-08

MAR-08

MAY-08

JULY-

08

SEPT-0

8

NOV-08

JAN-09

MAR-09

MAY-09

JULY-

09

SEPT-0

9

NOV-09

JAN-10

MAR-10

MAY-10

JULY-

10

SEPT-1

0

NOV-10

JAN-11

MAR-11

MAY-11

JULY-

11

SEPT-1

1

NOV-11

JAN-12

0

2

4

6

8

10

12

14

16

18

Inflation Graph

RATE

Source: - NSSO Graph For Inflation From Jan - 2008 To Feb-2012

Analysis :- From the above graph 9 (source from NSSO website) we came to know that the

inflation start from the month of Jan 2008 and it was in the peak at the period for 14 months

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from march 2009 to May 2010. Then after the inflation come down to 7.57% which continues till

now.

8. ESTIMATED IMPACT OF INFLATION ON CONSUMPTION PATTERN

8.1. WHO ARE AT RISK?

After conducting the study we come to know about the consumption pattern of the house hold

and from that we conclude that middle class house hold has adapt in live hood as an when price

change due to inflation. There is no change in their consumption pattern but there was a vast

change in saving pattern the middle class family can save more as because of the rise in

commodities prices.

Whereas the lower income group is concern the scenario is very bad . Due to

increase in the price of basic commodities they are facing very difficult time. As there did not get

basic commodities in ration and even if they get the basic commodities in ration the quality is

very bad to consume. Most of the lower class people do not have ration card in there house. So in

our opinion the lower income group are in risk of inflation.

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9. FINDINGS & CONCLUSION

9.1. Findings

1. Most of the household consumes all the commodities all the commodities like rice

wheat etc. but there is variation in their quantity.

2. The quantities consumed by middle class families before inflation and after inflation

is the same but for the lower income group price as well as consumption pattern has

changed.

3. Monthly saving gets affected for the majorities of the income group due to increase in

rate of food prices.

4. Majorities of the middle income group have ration card but lower income group does

not hold a ration card

5. Only 27% use ration card for purchase monthly commodities because it does not

fetch them quality food .

9.2. Conclusion

From the above information gathered we came to conclude that the consumption pattern

of middle income group has not changed much even through there is inflation but there is

a little change in saving pattern. Lower income group has a major problem in

consumption & saving pattern due to increase in the rate of inflation.

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IMPACT OF INFLATION IN CONSUMPTION PATTEN

Name of respondent: /_______________________________/ Date: /_________________

Respondent's DetailsAge (years): Gender: Education level: Marital Status

Household DetailsNumber of household members:

Type of household Main occupation(s) of the household:

Household assets

Joint family

Nuclear family

Service

Govt

Private

Business

Agriculture

Unemployed

Television Motorcycle/scooter Four-wheel vehicle Owned house

1. What is your household income?a. Below 5000b. 5000 - 10,000 c. 10,000 – 20,000d. Above 20,000

2. Can you tell us what commodities you buy for daily consumption?

Rice Wheat/atta Pulses Pulses (type 2)

Oil (type 1) Oil (type 2) Sugar Other

3. In an ordinary month, how much commodities do you normally consume?

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Rice Wheat/atta Pulses Pulses (type 2)

Oil (type 1) Oil (type 2) Sugar Other

4. How much amount do you spend on monthly commodities?

COMMODITIES BEFORE INFLATION AFTER INFLATIONQuantity Amount Quantity Amount

RiceWheat/attaPulsesPulses (type 2)Oil (type 1)Oil (type 2)Sugar

Other:-

5. How frequently did your family consume the following items?

Vegetables Milk Fruits Eggs Meat or fishDailyWeekly

6. Does everyone in your household get at least three meals a day throughout the year?

Yes:- No:-

7. Has it ever happened, during the last three months that some people in the household had to skip a meal or sleep hungry because there was not enough grain in the house?

Yes: - No:-

8. Does your household have a Ration Card?

Yes:- No:-

9. Do you use ration card to get monthly commodities?Yes:- No:-

10. Suggestion (if any)

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……………………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………………

10. REFERENCE

1. Study of impact of food inflation on middle class consumer’s household consumption of milk with reference to Thane city Dr. S. B. Kishor1al and Dinesh Gabhane

2. Food and prices in India: impact of rising food prices on welfare by Nathalie Pons Centre De Sciences Humaines (Delhi)

3. Wikipedia (about inflation )

4. NSSO website for secondary data about inflation

5. Department of Commerce and Science website (Govt of India )

6. Family and welfare website (Govt of India ).

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11. APPENDIX

1. ITM Institute for Technology And Management2. NSSO National Survey And Statistics Organization3. FPI Food Price Index4. GDP Gross Domestic Product5. FCI Food Corporation Of India6. WPI Wholesale Price Index7. CPI Consumer Price Index

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