Does inflation mean the same in Kochi as in Kolkata? Do Delhi and Dehradun share the same price experience? Or Mumbai and Meerut? Intuitively, the answer would be no. Yet reams are written on inflation as if it?s a nationally uniform data set. Now, number crunching by this newspaper has demonstrated, from publicly available data, that we need to nuance our inflation discussion. Consumer prices in different regions and cities vary. Sometimes they vary widely. The national market implicit in many economic policies?and commentary?is often only a theoretician?s construct. Especially in a large country like India, markets in different regions may not just be differently structured, but may even be going through different phases of the business cycle. Add to that rigidities and inefficiencies that prevent cross-regional integration. Then it is easy to explain not just substantial regional variations in the magnitude of consumer price changes but also trend differences. To be fair to economic theory, it has explanations for fractured markets, too: transmission mechanisms. That is, to take one example that may make sense particularly in these times, regions with a larger share of small and medium enterprises would be the most sensitive to monetary policy changes. And monetary policy would have a smaller impact in areas with a disproportionately large share of big companies and/or large banks; bigger firms and banks can withstand monetary policy shocks more effectively.
But, hold on, we are not blaming RBI, not this time. There?s very little a central bank can do to specifically address spatial diversity. There really can be only one national monetary policy. Just as there can be only one currency, one system of banking regulation, etcetera. However, such differences in inflation experience do point to another reason why central banks should be more circumspect before using harsh monetary policy measures. Unequal distribution of impact is a classic outcome of interest rate hikes in an economy that is host to a large number of small and medium businesses. Credit is choked off for small players. The big guys have the option of external commercial borrowings. If big business is concentrated in a few areas, hard interest rates promote regional inequality. Something to think about, surely?