The difficulty of inflation control under our current circumstances
The standard neo-classical prescription of monetary tightening could worsen conditions for many
Recent estimates of inflation from the consumer price index (CPI) as well as wholesale price index (WPI) confirm that the Indian economy is in the midst of an inflationary spell. CPI inflation across India this April was 7.8%, with higher inflation in rural areas at 8.4%. While the retail rate of price-rise has breached the Reserve Bank of India’s (RBI) upper limit of 6%, WPI inflation has been in double digits for more than a year, with April’s rate of 15.1% the highest in the WPI’s 2011-12 series. It is also clear that this inflation is not transitory and is likely to stay elevated for some time. A break-up by items shows that volatility in food and fuel may have contributed to the problem, but even core inflation is now close to 6%, which suggests a broad- based increase. In an unscheduled decision of RBI’s rate-setting panel last month, policy rates were hiked. This came after months of RBI denial of the threat, even though all statistics were pointing towards it. It was clearly caught off-guard. Although late, RBI’s monetary moves will likely help in moderating inflationary pressures.