 |
| : ( Inflation High Human Low : ) |
What is inflation?
- Simply put, inflation is the sustained increase in the overall price level. Relative change in prices of goods and services is a desirable attribute of market economy as it reflects productivity changes as well as demand and supply conditions.
- However, when this process transforms into an acceleration of the overall price level, we need to worry as inflation imposes many socio-economic costs.
(Below Speech by Deepak Mohanty, Executive Director, Reserve Bank of India, delivered at the Motilal Nehru National Institute of Technology (MNNIT), Allahabad on 13th August 2011)
- The headline wholesale price index (WPI) inflation averaged 9.6 per cent in 2010-11 as compared with 5.3 per cent per annum in the previous decade.
-
READ THIS CAREFULLY: -- " Similarly, the average consumer price inflation, measured by the consumer price index for industrial workers (CPI-IW), was even higher at 10.5 per cent in 2010-11 as compared with 5.9 per cent per annum in the previous decade. Moreover, this elevated level of inflation also persisted through the first quarter of 2011-12. In response to inflationary pressures, the Reserve Bank has raised the policy repo rate 11 times bringing it up from a low of 4.75 per cent in March 2010 to 8.00 per cent by July 2011. It is expected that inflation should come down towards the later part of this year. "
- Why has inflation been so high and persisted for so long?
- This is the theme of my talk today. In my presentation, I propose to address the following questions: Is India an outlier among major countries in terms of recent inflation performance? Has the inflation process changed? What are the causal factors – global and domestic as well as supply and demand? I will conclude with some thoughts on managing the inflation dynamics on the way forward.
Source from RBI or click here
Is India an outlier in the inflation performance among major countries?
It is important to appreciate the global backdrop in which we are experiencing a resurgence of inflation now. In the last decade, inflation was low, both in advanced countries as well as in emerging and developing economies till the global financial crisis unfolded. Consequently, global economy got into a recession and global output declined by 0.5 per cent in 2009. However, global output growth rebounded to 5.0 per cent in 2010.
As the global economy recovered from the worst effect of the global financial crisis, inflation picked up in emerging and developing economies. This was because the global recovery was largely driven by emerging market economies (EMEs) what was termed as a two-speed recovery – a faster growth in EMEs accompanied by a slower growth in advanced economies. As output gaps closed, there was increasing inflationary pressure in EMEs, particularly in Asia. According to the International Monetary Fund (IMF), consumer price inflation in developing Asia almost doubled from 3.1 per cent in 2009 to 6.0 per cent in 2010 and is projected to be around the same level in 2011. Latest data suggest that inflation in rapidly growing BRICS1 remains elevated (Table 1).
Country | 2010 (Average) | 2011 (Latest)@ |
| Brazil | 5.0 | 6.9 |
| Russia | 6.9 | 9.0 |
| India | 9.6 | 9.4 |
| China | 3.3 | 6.5 |
| South Africa | 4.3 | 5.0 |
| * WPI for India and CPI for other countries. @ June/July (year-on-year) | ||
With recovery, global commodity prices rebounded given the higher level of commodity intensity of growth in EMEs. There was also an element of financialisation of commodities given the global excess liquidity2. Crop loss due to adverse weather conditions in many parts in the world coupled with increased diversion of foodgrains towards biofuel exerted added pressure on global food prices. Thus, global commodity prices including food prices rose sharply. For example, the IMF Commodities Index rose by 24 per cent in 2010 on top of an increase of 43 per cent in 2009. It further rose by 20 per cent in December 2010–April 2011, before moderating by about 2 per cent during June–July 2011. Notwithstanding some softening in the last few months, it is important to recognize that the current level of commodity prices is almost double of that two and half years ago (Table 2).
Dec-08 | Dec-09 | Dec-10 | Apr-11 | Jul-11 | |
| All Commodities | 98.4 | 140.9 | 174.7 | 209.9 | 198.9 |
| Food | 119.6 | 139.5 | 176.4 | 190.9 | 180.3 |
| Beverage | 132.5 | 176.7 | 192.6 | 216.6 | 210.0 |
| Agricultural Raw Materials | 87.6 | 111.2 | 146.9 | 171.6 | 161.5 |
| Metals | 107.5 | 176.8 | 233.6 | 250.1 | 242.2 |
| Energy | 91.6 | 137.9 | 167.1 | 212.6 | 200.7 |
Has the inflation process changed?
In India, we have multiple price indices – 6 consumer price indices and a wholesale price index (WPI). While the Reserve Bank examines all the price indices both at aggregate and disaggregated levels, changes in the WPI is taken as the headline inflation for policy articulation. Within the WPI, non-food manufactured products inflation is considered the core inflation.
any Comment!! EmoticonEmoticon