Double Digit Inflation ?
Are we ready for Double Digit Inflation !!
WPI accelerated to 12.94% year-on-year in May, versus 10.49% year-on-year in April, mainly due to the rise in global commodity prices.Fuel prices accelerated by 37.61% year-on-year in May.
CPI inflation at 6.30% is also way above the general expectations and falsifies the claim that higher WPI does not imply higher CPI and that the producers would continue to absorb the price pressure without passing on to the consumer.
The sequential build up in cost pressures and disruption of supply chains due to the localised lockdowns have contributed a great deal to the retail price rise.
The surge in inflation has been across all components including, food, fuel and core inflation. Usual bogey man viz. Vegetable Prices is not the lone reason .Core inflation too has risen to 6.4% .The key point to note is that the economy would have even contracted in Apr June quarter .
While the demand force in the economy remains very weak and that RBI continues to believe that the demand impulse would not pick up any time soon , the concern is that the supply-side factors & inordinately high level of tax on petroleum products would continue to put upward pressure on inflation going forward.
More than the conventional factors, this inflation surge is decisively a monetary policy driven- which the policy makers may not admit . With such a humongous fiscal deficit continuing to be managed with RBI support ,this reckless liquidity creation is fuelling unprecedented rise in prices .
There will be claims that the Developed economies are also going through high inflation but it is necessary to remind ourselves that they have social security plans in place whereas India does not have .
While this calls for the RBI bringing all options on the table, including a rate hike, it is certain that they would continue to do what they have been doing without any course correction over the last 15 months.
They would continue to replicate DM central banks and assert that the 6% plus inflation is transient . They would definitely showcase USD 600 bio of Fx reserves, which is of absolutely no use to combat this inflationary spiral.Their paramount mandate is providing liquidity support for the equity bubble and keeping the 10 year yield anchored at 6 % for this Rs. 13 trillion borrowing programme .
Prepare yourself for Double digit inflation and being lectured how it is transitory .