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S. Balakrishnan

It is always and only a monetary phenomenon, say economists of conservative and monetary hues about inflation. Their policy prescription is simple. Keep increasing interest rates and constricting liquidity till inflation starts falling.

In the Indian context, there is also a section of economists (today perhaps a minority) advocating benign policies. This group thinks growth will become a casualty if interest rates keep going up. The more sophisticated among them argue that if the Consumer Price Index (CPI) is used as the inflation measure, the latter is significantly lower. After all, the CPI is the benchmark everywhere except India. But this can easily work the other way – one need only go back a few years to realise that the CPI behaved worse than the presently widely disseminated Wholesale Price Index (WPI) for a period of time.

Besides, the WPI and CPI baskets are not even similar, let alone identical. The WPI components include metals and industrial goods - not the stuff consumed in households. Obviously, we are tracking some CPI- irrelevant prices. In this respect, our WPI resembles the Producer Price Indices (PPIs) of the US, Europe and the UK. Their CPIs entirely exclude industrial commodities and goods – as they must.

These sins of omission and commission have not deterred commentators from attacking the RBI’s policy tightening. It is more than likely that our central bank has got a better take on the inflation situation.

The current inflation bout is different because there is no noticeable spot supply shortage in commodities, agris or manufactures. The price spurts seem to discount an unknown and uncertain future of surging demand which will not be fully supplied.

There was a prolonged phase of soft food, energy and commodity prices in the nineties. Naturally, the terms of trade favoured manufacturers vis-À-vis commodity producers and farmers.

In turn, final consumers benefited from globalisation which fostered manufacturing in low wage countries and capped prices. The technology revolution played its role in productivity improvements.

The asset price boom has created enormous wealth and far higher growth rates, especially in emerging markets. Though there is no current demand-supply imbalance, it does not take much imagination for market wizards to figure out (and propagate) the idea of possible future shortages and build that into spot prices.

Thus, the inflation of recent times must also be seen as better terms of trade evolving for agriculture and commodities and not the result of monetary laxity. This is buttressed by the weak pass through of rising upstream inflation (PPI) to the CPI.

Comforting thought, one is sure, for central banks.

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