Inflation revisited

I talked about a common man's definition of inflation. Alex talks about a more technical definition. I agree with him that one of the major reason for increasing inflation is due to increase in fuel prices. But he forgot to mention the increasing prices of Basic Metal Alloys and Metal Products. So the inflation is mainly due to international reasons.

I am not sure that the government has reduced import duties in wake of inflationary pressure. The increase in repo rates has been the primary technique used by government to reduce the inflation impact. I also dis-agree with Alex that there is no overheated demand. The disposable income of a common man has certainly increased and so are the ambitions. So increasing the interest rates is just a way to choke the rising demand, which I am not sure whether is a perfect way of taming the inflation beast.

4 comments:

  1. Well K,
    I agree i forgot to mention the metal prices.
    I am moving my blog to wordpress.
    So could you change the address of my blog in your links?

    ReplyDelete
  2. Hey Alex,

    Will make the change..

    -K

    ReplyDelete
  3. Dear K,
    The fact that the prices of goods are rising is evident but RBI says there is nothing to worry. As the WPI is well under the level of concern. The WPI is a fallible measure of inflation. I had mentioned this in my blog earlier.

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  4. putting all these things at bay, what i took few months to understand is that, RBI (or federal bank of any country) increases the money supply over time to meet demand (and govt obligations too)(it happens literally every day, sometimes sucking extra money and sometimes releasing a lot more, but consider a period of time, it would be positive). (in ben bernanke words, it is dropping money by helicopters into economy). Yes, ofcourse economy size has grown in absolute terms (like your money grows by interest rate).

    Absent all other things, currency gets devalued solely because of excess money supply. And you don't expect the same goods and service for your old devalued currency notes, buck up more.

    ReplyDelete