Panic, inflated

The only thing surprising about the wholesale price index inflation figures released on Friday is the size of the jump, which is larger than expected, crossing as it does a psychological barrier to 11.05 per cent. This is the first effect of the 10 per cent increase in fuel prices, which was only partially offset by a marginal decline in food prices. Unsurprisingly, the finance minister has warned that 8220;stronger measures8221; are to be expected, both on the demand side and in terms of monetary policy. The Congress has basically told the UPA government that the numbers are politically impossible to ignore. Policy-makers are thus caught in a cleft stick, as both the political and economic consequences of an over-enthusiastic reaction may be equally problematic.

To a degree, the government is not responsible for its own misfortune. It would be a miracle if the doubling in the international price of crude oil was not reflected in the inflation rate. RBI8217;s puzzling insistence on managing exchange rates 8212; effectively passing the burden of subsidising exporters on to banks and their users 8212; instead of focusing on inflation is a large part of why we got here. Now the same set of voters, the urban middle- and lower middle-class, those whose defection from the BJP paved the way for the UPA8217;s electoral victory, will find their home loans and EMI payments eating up an even larger chunk of their household budgets.

Yes, it might be politically unfeasible to not take measures against higher inflation. Economically, as well, allowing permanently higher expectations of future inflation to develop would be disastrous. But the government must not let the larger-than-expected jump panic it into using blunter policy measures than strictly necessary: for one thing, as our columnist today explains, the numbers only insufficiently explain the actual impact on the poor. In addition, any fiscal over-reaction might continue to have an effect on growth even when prices have stabilised, with unfortunate consequences for both the UPA and the economy at large.