The Hindu Business Line : Inflation control: Limits of monetary policy

Switch to a daily wage earner on subsistence wages and the picture is very different. Day-to-day necessities consume most of an uncertain income. Food inflation strikes at the root of his existence.

The upwardly mobile, on the other hand, has an entirely different profile of inflation sensitivity – the cost of good housing, personal transportation, quality education and health care.

While inflation means a general rise in prices, it does make sense to distinguish among food inflation, energy inflation, commodity inflation, wholesale price inflation, consumer price inflation, wage inflation, inflation in manufactured goods and (the latest) asset price inflation.

Also, is general inflation demand-driven or cost-pushed? What about demand and supply elasticities? Inelasticity translates into price rigidity and makes policy actions ineffective.

First priority

A sensible government must first attend to inflation in basic goods. After all, the first priority is to keep the masses off street protests.

At this fundamental level, our rulers come out with flying colours. Rationed rice costs Rs 2, the market is Rs15 and more. Rice and wheat exports were banned the moment the government smelt a global shortage and rising prices. Buffer stocks are more than adequate.

Food security, thankfully, has not been compromised, even as the quality ofgovernance touches new lows.

Edible oil, vegetable and fruit prices are up reportedly 50 per cent and more. That could be because of a demand spurt or supply shortfall or a demand inelastic situation.

(The ‘efficient’ and ‘cost effective’ supply chains of the new retail giants seem to have failed here). Hopefully, their prices will trend back to normal in time as supply augments.

Energy conservation

On energy, there is no excuse for dithering on indexation to global prices and subsidising the consumption of expensive oil. We have forgotten elementary economics – market prices are signals and stimulants to improve efficiency and productivity and shifts to alternative, cheaper sources.

Surely, we can start with differential (much higher) levies on big cars and Sports Utility Vehicles (SUVs) both at purchase and fuel consumption points.

With our advances in information technology and communications, we ought to encourage managers and knowledge workers to work as much as possible from home.

This applies with even more force to governments. The energy saving and relief in traffic congestion are incalculable.

What is the upshot? Monetary policy and interest rates have far less to do in inflation management than generally imagined. A far greater onus seems to lie with government.