Home / Opinion / Views /  Inflation numbers show tighter monetary policy is no magic wand

Wednesday’s inflation print shows us, once again, just why central banks and governments, the world over, dread inflation. Once inflation takes root, it is almost impossible to root out; not without inflicting enormous suffering, especially on the poor, and entailing growth sacrifice. At 7.41%, year-on-year, India’s consumer price inflation (CPI) for September 2022 is sharply up from seven percent in August 22 and is also well above most estimates.

More worrisome than the increase in the headline number is the sharper increase in food inflation. At 8.41%, up from 7.57% in August 22, high food inflation is unmitigated bad news for a country like India with a substantial number of its people below the poverty line. Sadly, the acceleration is broad-based with basic food items like cereals, vegetables, spices, pulses and milk recording a sharp increase. Vegetable prices are up 18.1%, up from 13.3% in August. Unseasonal rains and, in tandem, the prospect of lower rice output, suggest the underlying drivers of high inflation today are unlikely to be ‘transitory’.

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Unfortunately, the bad news doesn’t end there. Core inflation, i.e. excluding food and fuel inflation, which should normally be amenable to tighter monetary policy, is also higher at 6.07%, up from 5.84% in August. And, as with food inflation, the increase is broad-based, with most items, housing, clothing, footwear and household goods and services recording a quickening in the pace of increase.

All this despite the fact that the RBI has been on a tightening cycle since May 2022. Policy rates have gone up 190 basis points in less than six months. Yet we have seen little respite from inflation, suggesting, yet again, that tighter monetary policy is no magic wand; it acts with long and uncertain lags.

Add to that a depreciating currency, thanks to the strengthening dollar; the prospect of a return to the days of high oil prices, thanks to the OPEC decision to cut output; return of festive demand after two years of subdued spending due to Covid, and the RBI’s cup of woes is full. Our overwhelming dependence on imported oil means there is no escape from the pass-through from higher oil prices combined with a weakening rupee, even as higher prices for imported goods in general means the war against inflation is unlikely to be won easily or quickly.

Contrary to the RBI Governor’s Shaktikanta Das’s claim in the minutes of the August meeting of the Monetary Policy Committee, inflation has neither "moderated" nor "plateaued". This is bad news for a central bank whose options clearly are running out. Tighter monetary policy from central banks the world over, led by the mighty US Federal Reserve, leaves the RBI little room but to tighten rates. If not in step with the Fed, it certainly cannot afford to be entirely out of step either.

For the government too, the latest numbers are bound to compel a rethink. As recently as September 2022, Finance Minister Nirmala Sitharaman had described inflation is no longer a "red-lettered priority". Speaking at the India-US Business Council annual meet, the FM stated inflation has been brought down to a "manageable level". Evidently not!

No wonder the International Monetary Fund, in the latest update of its World Economic Outlook, has upped its estimate for global inflation to 8.8% and 6.5% for 2022 and 2023 respectively, even while lowering its growth estimates. High inflation invariably impacts growth adversely, especially when, as we have seen, inflation and inflationary expectations get entrenched.

The latest numbers are noteworthy for another reason. They mark the ninth consecutive month that retail inflation has come in at above the upper end of the RBI’s inflation target of 2-6%. Under the Inflation Targeting (IT) regime, adopted as part of the New Monetary Policy Framework in 2016, failure to keep inflation within the target range for three consecutive quarters requires the RBI to write a letter to the government explaining both the reasons for its failure and the remedial action it proposes to take to get inflation back within the range. Since a part of the blame for today’s high inflation must rest with the RBI and the MPC for its failure to roll back monetary accommodation (rightly extended during Covid) in time, the central bank is in a far-from-enviable position today.

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