: The WPI based Inflation rate has crossed 8 per cent. Inflation data in recent weeks has become a source of short-term, short-sighted measures by the Government to control prices. Measures such as banning exports or imposing high export duties and banning futures markets are likely to hurt the investment climate and do nothing to control prices. As a result of the sharp increase in prices in March, inflation numbers in the coming six months are likely to remain high.
High growth of liquidity last year and the rupee depreciation of last month might also push up prices further. However, panic reaction such as higher interest rates or direct price controls must be avoided. At this moment, it is important that people understand the projected path of inflation for the next few months. Better measurement and communication need to be essential elements of government policy.
The rate of increase of prices, or inflation, can be measured in many different ways, such as year-on-year, month-on-month or week-on-week. One method of measuring inflation is to measure the increase in prices over the same period last year. Since there is seasonal variation in prices, this simple measure is often used. It makes sure that mango prices in May 2008 are compared to mango prices in May 2007. This “year-on-year” growth is traditionally the inflation figure reported in India. The 7.8 per cent based inflation in the Wholesale Price Index is the increase in WPI over the increase in WPI last year.
This measure is not useful in telling us how prices are moving today. If the price of steel is stable all year, goes up in one week by 10 per cent, and then does not increase the rest of the year, the “year-on-year” inflation in steel will be 10 per cent that week and will continue to be high for the next 51 weeks. This could give the false impression that steel prices are continuing to rise sharply.
