Relative Prices versus Inflation

Terms of trade have shifted away from agriculture toward manufacturing and away from manufactuing toward services since the industrial revolution started. This shift in terms of trade accelerated during the decades following World War II.

I have maintained that the introducton of 3 billion new producers and consumers into the free market system in the ealy nineties created a potential oversupply of labor for manufacturing (China) and services(India). The technology, media and communication revolution has made services tradeable. At the same time, the introduction of the new producers and consumers has increased the demand for agricultural products while reducing the labor supply to agriculture.

The increases in food and other agricultural prices are not real inflation in my view. They are a correction of the terms of trade toward agriculture away from manufacturing and services.

Gangadhar Darbha wrote a very interesting article (http://www.business-standard.com/india/news/gangadhar-darbhaanatomyinflation/422590/) in an Indian newspaper about the difference between relative price changes and inflation. I endorse his view completely.

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