Inflation Figures

The inflation figures released today are quite realistic in nature and have confirmed the fears that I have been citing for such a long time. I still differ from the planning commission that food prices will moderate in the coming weeks, it cannot- people do not change food habits so fast. Government will need to look at supply side constraints to contain prices; it is as simple as that. Depending on any kind of monetary policy to contain inflation would be a mistake. The higher food prices will hamper the recovery of the economy in a big way. While the RBI has indicated of higher interest rate regime in the coming months, it would not be enough to contain inflation. It may be counter productive, in the sense that it will further slow down the process of recovery with not much impact on consumer level inflation. We are in a tight and critical situation and each step must be carefully thought off before being executed.

[Note: According to the figures of 5-Nov-2009]

Impact of Inflation

Looking at the figures released yesterday the inflation has maintained an upward tick. While the upward move was statistically expected the worrying part is the build of inflation this fiscal that is around 6% and which is higher than last year. If we look at the components, the numbers worry me more because the inflation has been higher because of basic items like tea, pulses, spices etc. If we exclude the drop in prices of items like aviation turbine fuel and light diesel oil the inflation figures would become more worrisome. If the current trend continues we would land up at an annual figure of between 8-10% that would translate into 20% inflation at the consumer level. Looking at the trend I think the government has to become more proactive to control inflation than RBI.