July 03, 2006
Abstract: Since July 2004 when the Wholesale Price Index spiked due to rising oil prices post-Iraq War, inflation has remained a dominant concern, prompting the RBI to raise interest rates several times. Inflation has since subsided. But the perception of “true” inflation in the last few weeks has been influenced by the political rhetoric against the government following a sharp hike in the prices of pulses and vegetables.
When inflation is driven by a universal input like energy, the impact is macroeconomic: affecting all prices. But inflation confined to specific sectors such as pulses and fresh vegetables is microeconomic in nature; such inflation cannot be tackled by monetary policy, since they arise from supply-demand mismatches of individual commodities. RBI must therefore have a correct understanding of the cause of inflation.
The best way to prevent surges in the prices of fresh produce is to ensure that processed equivalents become affordable. But, shortages of rural infrastructure, cold chains, etc have made this difficult.
Keywords: WPI inflation; oil prices; food prices; core inflation; sector inflation; RBI policy; food processing; rural infrastructure; cold chain