Inflation accelerated to fastest pace in more than 16 years and touched 12.44 percent for the week ended August 09 2008. There is a speculation that the Reserve Bank will further tighten monetary policy in its bid to curb credit growth and tame inflation. The inflation rate was around 4.24 percent around the same time last year.
Inflation might further rise after Prime Minister Manmohan Singh’s cabinet approved an average of 21% pay rise for 5 million Government Employees. This will lead to an increase in fiscal deficit and keep interest rates high. “The whole objective of monetary policy at this point in time, which is to contain and manage demand, is going to face some hurdles,” said Shubhada Rao, chief economist of Yes Bank in Mumbai. “The pay revision is clearly going to add to demand pressures on inflation.”
The Stock Market reacted immediately showing a fall of 3 percent to 14,243.73 points. The concern is faster inflation will crimp consumer spending and add to slow economic growth.
The RBI last month raised its inflation forecast for the year to March 31st to 7 percent from the previous target of 5.0-5.5 percent. The Bank’s next policy announcement is due on October 24 2008.
Arvind Virmani the finance ministry’s top economist said that the Inflation is likely to remain high and will take at least 12 months before it moderates to the central bank’s tolerance level of 5%.
What does this rise means to a common man?
According to the Wholesale Price Index (WPI), which is India’s most closely watched cost-of-living monitor as unlike the consumer price index (CPI), which is published monthly, the WPI covers greater number of products in its computation and is published weekly, inflation rose on primarily on account of higher prices of manufacturer products including textiles and cement.
Here is how the price moved for the WPI group items:
These group showed declined:
- sunflower 8 percent
- niger seed 6 percent
- raw rubber 2 percent
- copra and raw cotton 1 percent each
These group rose in the price index:
So, we need to look at our spending habits so that we can sustain this inflation growth. It will be few months before we will get some respite from this growth.