Inflation, monetarists claim, is a monetary phenomenon as long as supply-side shocks are not there. That is like claiming to have the spouse’s permission to say that one is the boss of the house.
Supply-side changes happen slowly and are greatly influenced by micro rigidities in that particular industry or segment. One such micro rigidity is regulatory control of prices. In the face of high inflation, the government tries to moderate it by controlling prices. Such control of prices looks like the right thing to do, but in fact it is exactly the wrong thing to do.
Comparing industries that are price regulated, such as electricity and railways, with those that are not, such as telecommunications and aviation, throws up interesting data. (I have purposely ignored the recent aviation policy, which is trying to regulate some aspects of airline pricing.) Over the past nine years, revenue realised by railways for carrying 1 person for 1 km has increased from 27 paise to 40 paise—a rise totalling 48%. If we use the same metric for Jet Airways (India) Ltd’s domestic business (as a proxy for airline industry), we see a fall in cost of 9%, from Rs.5 to Rs.4.54.
