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Inflation at 6.68%


The latest weekly release of the WPI Index, according to the Economic Times, is at 6.68%. This is the highest we’ve seen for a while.

High inflation is a big election problem and the only way to counter it is high interest rates. We already have high interest rates. Will the RBI increase them further?

Also it could reduce the money supply in the country, if the inflation is a function of greater money supply. But it seems like there may actually be less of that as foreign investors take money out of the country. Though to be honest I have no idea what the money supply statistics are, and if the RBI has the ability to control it. (If it has to absorb the money by issuing bonds, it will increase govt. debt and such factors that I cannot even begin to imagine.)

The other thing the government can do is to curb speculation. Commodity prices contribute to the WPI, which determines the WPI inflation – and if they banned trading of certain commodities the govt. will “appear” to have controlled inflation. In reality all that does is to create a grey market for the same goods, because who will sell to the government for cheaper when someone is willing to pay more? A ban is stupid, but a choice between smart and “appear good to the common man” always yields the latter, from our political history.

Still a commodity trading ban will affect not just farmers but also anyone else that is using or selling the commodity, including listed companies. Watch this space.

Is this a one time thing? Last year, at this time, WPI inflation was over 6%. Meaning we don’t have a “low base effect”. Two weeks more and we should see a trend. If the prices dip back we have no problem.

I’m seeing a lot of TV and media interest in the price rise – alu, pyaaz and all that. That’s a bad sign – in this day of yellow journalism, the media doesn’t usually go behind important topics like inflation when they have other fascinating stories like how Aishwarya Rai refused Will Smith, how Dhoni has been seen with Bipasha Basu and so on. So when they focus on inflation you know that it has become serious.

Inflation by itself isn’t so bad for the stock market investor. It’s the impact of measures to CURB inflation that can affect your investment.


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