Has inflation peaked? Is the worst behind us?
It takes some courage to make such forecasts, especially when the rapid pace of price increases has taken just about everybody by surprise over the past few weeks. It would have been hard to find a single economist or forecaster at the beginning of the year who would have said that the inflation rate would be as high as 7.5% by the middle of 2008.
Yet, two senior policymakers—Montek Singh Ahluwalia and C. Rangarajan— have predicted this week that inflation is likely to drop soon. Rangarajan, who heads the Prime Minister’s influential economic advisory council, believes wholesale price inflation will drop to 6% over the next three months.
That seems quite likely. The spurt in farm production could help ease food prices— and general expectations on inflation. The duty cuts announced by the government and the attempts by the Reserve Bank of India to cool down the economy could also help.
But a drop in the inflation rate to around 6% will only be a temporary relief. It’s still too high and will have to be tackled through some combination of tighter monetary and fiscal policies. Some would even argue for a sharp appreciation of the rupee to bring down the price of imports. For all the noise it has generated, the policy response to high inflation has been week. Politicians currently seem quite content with attacking straw men, such as commodity speculators and industry cartels.
Let us also not forget that the inflation rate has been artificially suppressed in India. Global oil prices are inching towards $125 a barrel even as domestic prices have been capped.
The Goldman Sachs analysts who had three years ago made the then-brave forecast that oil would cost $100 a barrel now say that it is headed towards the $200 mark. Anyway, the government will have to increase fuel prices at some point of time so that consumers pay market rates rather than living off subsidies—unless it wants to race towards fiscal ruin.
Sure, inflation is likely to come down over the next few months. But let’s not get carried away by this minor victory. The battle ahead promises to be a long one.
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