A few weeks ago the data for inflation was released by the government. On the face of it things looked so much better than what they had been a year ago. The inflation measured by Wholesale Price Index (WPI) fell to its three year low to 7.18%. The core inflation fell to 4.2%. This has led many to believe that the Reserve Bank of India (RBI) will reverse its hawkish approach. This means they expect RBI to start rolling back the interest rates. But is inflation really down? Has the era of high inflation come to an end? Unfortunately no.
The WPI and core inflation have certainly come down in recent times. But the inflation measured by the Consumer Price Index (CPI) stubbornly continues to be high at 10.56%. This is the index that measures the incidence of inflation on the common man. More alarmingly, this rate has actually gone up in December 2012 as compared to the month ago figure of 9.9%.
As per a leading daily, the reason for this mismatch is that while bumper crops have helped ease the wholesale inflation, mismanagement on the distribution side has hurt the consumer inflation. The reason behind this is the bottleneck on the supply side. This curse still continues to keep inflation high. Unfortunately till something concrete is done to ease the situation on the supply side, inflation would continue to remain high. Much higher than the government's target limits of 4 to 5%.
Experts and government officials have been blaming the RBI for quite some time for causing the slowdown in the economy. They have said over and over again that RBI needs to cut down interest rates to boost investments. Only then will the supply side issues get sorted. But interestingly the CPI inflation has not come within the government's target range all the way since February 2006. This implies that the problem is not something that was triggered by the RBI's decision to turn hawkish. The problem is more structural in nature. Only way to solve this is to press the accelerator on policy reforms. Otherwise inflation is not really going to come down. Yes we may have some random readings of lower rates for some months. But the overall trend would remain high. It is high time that the government pays heed to this.
The WPI and core inflation have certainly come down in recent times. But the inflation measured by the Consumer Price Index (CPI) stubbornly continues to be high at 10.56%. This is the index that measures the incidence of inflation on the common man. More alarmingly, this rate has actually gone up in December 2012 as compared to the month ago figure of 9.9%.
As per a leading daily, the reason for this mismatch is that while bumper crops have helped ease the wholesale inflation, mismanagement on the distribution side has hurt the consumer inflation. The reason behind this is the bottleneck on the supply side. This curse still continues to keep inflation high. Unfortunately till something concrete is done to ease the situation on the supply side, inflation would continue to remain high. Much higher than the government's target limits of 4 to 5%.
Experts and government officials have been blaming the RBI for quite some time for causing the slowdown in the economy. They have said over and over again that RBI needs to cut down interest rates to boost investments. Only then will the supply side issues get sorted. But interestingly the CPI inflation has not come within the government's target range all the way since February 2006. This implies that the problem is not something that was triggered by the RBI's decision to turn hawkish. The problem is more structural in nature. Only way to solve this is to press the accelerator on policy reforms. Otherwise inflation is not really going to come down. Yes we may have some random readings of lower rates for some months. But the overall trend would remain high. It is high time that the government pays heed to this.
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