No.  Inflation is everywhere and always a monetary phenomenon.  But that didn’t prevent Bloomberg’s astute journalists from speculating that an Indian drought would exacerbate its already burgeoning inflation.  From Inflation in India May Quicken on Deficient Rain:

Monsoon rain in India will be below normal for the second time in three years, the weather office said, potentially lowering farm output and accelerating inflation which is the highest among Asia’s major economies.

Rainfall will be 95 percent of the 50-year average in the June-September season, Science and Technology Minister Pawan Kumar Bansal told reporters in New Delhi yesterday. That compares with 98 percent predicted by the India Meteorological Department in April. The bureau defines normal precipitation as 96 percent to 104 percent of the long-term average.

Prime Minister Manmohan Singh is relying on adequate rainfall to harvest record quantities of food grain and oilseeds for a second year and cool inflation, which has led the central bank to raise interest rates 10 times since mid-March 2010. Agriculture makes up almost 14 percent of the economy and a reduced farm production can also lower rural incomes, hurting sales of tractors and cars.

“We have seen food inflation cooling down all the way from 20 percent to 8 percent year-on-year and if rains disappoint then obviously that trend can reverse very quickly,” Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc., said yesterday. Inadequate rainfall “is likely to damp rural demand which in our view was extremely important in the overall economic activity” in the last fiscal year, she said.

For heaven’s sake, four paragraphs in, they claim that inadequate rainfall is apt to dampen rural demand, which, in their queered-up understanding of how money works, would tend to deflation, not inflation (it’s not, but that’s what they would call it).

If food prices increase in India because of a lack of rain, i.e., because of lessened supply, that is not inflation, but is instead an ordinary market adjustment of supply and demand curves, with the pricing mechanism signaling to the market that more is demanded than is being supplied. 

If the pricing mechanism works appropriately, i.e., if there isn’t too much friction caused by lack of information, or perhaps regulatory pressures, or especially, monetary machinations, rural demand would instead increase, as farmers get paid a premium for their crops, funneling investment into the sector until outsized profits due to depressed supply conditions are eliminated.  High prices are always the cure for high prices because they incentivize higher output. 

But only if the prices are transmitting correct information.  What may cause prices to be signaling a disjunct between supply and demand that doesn’t exist?  Inflation, i.e., a cheapening of the currency relative to the value of the goods and services it is intended to represent.  Increased prices because of a cheapening currency is pretty close to exactly the opposite of increased prices due to supply shortages.  In fact, if prices incorrectly signal that demand exceeds supply, or add to the signal that might otherwise be caused by actual supply shortages, then the market will get even further out of balance, as more supply is created than is actually needed.

This really is nothing but classical economics 101, which assumes that over time, all goods and services have a downward-sloping demand curve, i.e., that the higher is the price, the lower is the demand, and vice versa.   Classical economics however also assumes that prices reliably communicate value, which is not the case when money, the metric through which prices are communicated, is being endlessly manipulated by the authority, i.e., the central bank of whatever economic system is in question, for any of the various reasons such authorities engage in monetary manipulations.

It really is incredible, after several centuries of exceedingly smart people having tried so diligently to tease out cause and effect relationships in market behaviors, that we still believe such hogwash as drought might cause inflation.  No.  Money causes inflation.  Drought might cause high prices, but that is not inflation. 

 

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