The dilemma of inflation

Tue, 8 Feb Pre-Open

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That inflation is causing serious problems in the emerging economies such as India and China, is a well documented fact. But the dreaded 'I' word is slowing creeping upwards in the developed world as well. Despite a poor recovery in the US and Europe, inflation there has reached 2.4% and 1.5% in recent times even though it was at historic lows throughout most of the crisis. Part of the reason has been attributed to higher commodity prices. Oil especially has touched the US$ 100 a barrel mark and the crisis in Egypt has only worsened matters further. And given that energy forms a larger part of the inflation number as compared to food for the developed countries, rise in crude prices is playing its part in pushing inflation up a tad bit.

In the emerging nations, inflation has emerged as a major concern. The biggest culprit has been soaring food prices. In India so far at least, the government's efforts have yet to bring it down within RBI's comfort levels. The Indian consumer has been spared from the impact of higher oil prices on account of the government's move to subsidize it.

Excessive money supply has also been contributing to this rise in inflation. For instance, in the developed world, as the government keeps printing money, there is more and more money chasing lesser goods and hence the prospect of inflation rising seems imminent if not now then certainly in the future. Further, a lot of this money is also finding its way to emerging markets and causing asset bubbles there. Not just that, as inflation rises, expectations of higher wages also increase in order to maintain the purchasing power.

The scenario in the developed world at least when it comes to inflation is not as worrisome as it is in the emerging countries. This is because the former is still struggling to shake off recession and because unemployment also remains alarmingly high. But the government's ineffective policies mean that when these economies do recover, inflation would certainly cause a lot of pain.

In the emerging world such as India for instance, the central bank has been hiking interest rates to keep inflation in check although this has so far not achieved the desired results. Looks like the RBI will have to tighten its noose further and be a bit more aggressive in order to temper down the rising prices going forward. This might lead to a little slowdown in the near term, but it will ensure that the long term health of the economy remains intact.