Core truths

Inflation stays high,but there are signs of hope...

Written by The Indian Express | Published: July 19, 2010 4:16:03 am

Inflation figures for June are out,and were expected to be scrutinised carefully given that the Reserve Bank of India has a quarterly monetary policy review meeting scheduled for later this month. The RBI has already tinkered with lending rates recently; a significant jump in inflation would make further tinkering a near-certainty. The figures eventually released showed that headline inflation,the most commonly examined figure,remains in double digits for the fifth successive month,a 10.55 per cent. But they also show more nuance than that.

Here’s the first interesting thing: food inflation remains flat,staying between 12.5 and 13 per cent (at 12.81 per cent this month). Indeed,Chief Economic Advisor Kaushik Basu went as far as to say that it will slow further before the end of the month. There are several reasons for this: one of the more important being that any irregularities in the monsoon do not yet appear to have affected planting schedules. Interestingly,it is therefore not completely clear what effect the fuel price hike has had on food prices. Much attention has been focused on “core inflation”,a fancy name for those parts of the inflation basket that aren’t food or (directly) fuel-related. Core inflation,it is argued,tells us if inflation is responding to pressures from the cost side,or from the demand side. But this is not an ideal situation for an easy application of that theory: the fuel price increase is still cascading through the economy.

Core inflation,therefore,even if significantly higher than it was last month — at 8.6 per cent instead of 6.6 — cannot be as easily interpreted as it would have been otherwise. Basu struck a note of caution,in fact: while he accepted that some demand management was inevitable,we could neither afford “drastic” movement on the stimulus,nor should we be scared by these figures. It is likely,he correctly pointed out,that before the end of this year,prices will in fact be lower than if we had not decontrolled fuel. It seems a policy of gradual exit from stimulus will continue.

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