INFLATION GENIE is out of bottle
INFLATION GENIE is out of bottle! And the world’s major countries are suffering from high inflation. India is also not left behind. Central Bankers, around the world, are sweating out to control inflation within their comfortable range.
Marred by the sub prime related crisis, several major economies of the world are now suffering from another problem of high inflation. Financial journalists compare the inflation to the genie in the bottle. If inflation is the genie, then Central Bankers are the magicians who always try hard too keep genie inside the bottle. But recent statistics of several countries suggest that the inflation genie has come out of the bottle and it is out of the magical trap of Central Bankers. Implications of higher inflations are well to the Central Bankers, and hence, they are restless.
Inflation is the situation of rising prices, when too much of money chasing too few of goods hence, making the prices of goods high. Situation of rising prices can be the result of either sudden increase in demand or may be slackening of supply. So typically, inflation can be either demand-pull inflation or supply constraints inflation. Sometimes, due to natural calamity, the market face slump in supply of goods and prices shoot up, sharply leading to inflation. Heavy hailstorm has pumped the inflation to more than seven per cent in China. But inflation of this type may be of temporary nature. However, reports of Chinese authorities, battling higher inflation even after months, are still coming.
On the other side, supply side problems are blamed for high inflation in our country. Inflation in India is slowly creeping up and recently it was reported at 7.41 per cent, which is very high from Reserve Bank of India’s (RBI’s) comfort level of inflation. Showing the concern of higher inflation, RBI chairman, has told in one of his speech that inflation mostly hit the poor and those who earn non-indexed income. Whatever benefit government is distributing to the poor, higher inflation is eating out most of it. Concern of RBI, regarding high inflation, is valid.
European currency, Euro, has appreciated 18 per cent against the United States Dollar (USD). The region is facing highest inflation for the last 14 years. As per European Central Bank (ECB) president, Jean Claude Trichet, “Europe’s inflation was above ECB’s two per cent limit for most part of the year in 2007. To fight the surging inflation, the bank has kept ECB’s main rate unchanged at four per cent since August 2007. During the same period, Federal Reserve System (FED) has cut the interest rate six times and brought it to 2.25 per cent this month.”
Apparently, Trichet has not bow down to the American pressure of aligning the interest rate in the Euro region with that of America. But Euro region is facing the burnt of appreciating Euro and the region’s export is being hit adversely. Difference in interest rate to the tune of 1.75 per cent may further mount upward pressure on Euro and worsen the export from Euro region.
Amidst high inflation, there are some countries having opposite trend of low inflation rate. Brazil is such a country, which registered fall in inflation in recent month. The annual inflation in Brazil in mid-March has slowed down to 4.55 per cent from 4.74 per cent in mid-February. It should also be noticed that the stock market of Brazil has also performed well in the last two months, contrary to the worldwide indices that were melting during the period. Out of Brazil, Russia, India and China (BRIC) countries, performance of Brazil in financial sector is different from rest of three countries in last several months.
In such a scenario, what will be the step of RBI in near future to combat the inflation will be worth seeing. Chances of lowering the policy rate (i.e. any of the bank rate, repo rate or reverse repo rate) by RBI appear to be very remote. Contrary to curb the inflation, the RBI may hike these rates. Tightening of reserve requirement by banks (read CRR) cannot be ruled out. Supply of dollar, due to sub prime crisis, is also restricted and Corporate India is finding it difficult to get fund from abroad to minimize the cost of borrowing. In such a scenario, corporate have to depend more on domestic banks and rupee resources, which may increase the cost of borrowing, ultimately affecting the corporate performance.
Marred by the sub prime related crisis, several major economies of the world are now suffering from another problem of high inflation. Financial journalists compare the inflation to the genie in the bottle. If inflation is the genie, then Central Bankers are the magicians who always try hard too keep genie inside the bottle. But recent statistics of several countries suggest that the inflation genie has come out of the bottle and it is out of the magical trap of Central Bankers. Implications of higher inflations are well to the Central Bankers, and hence, they are restless.
Inflation is the situation of rising prices, when too much of money chasing too few of goods hence, making the prices of goods high. Situation of rising prices can be the result of either sudden increase in demand or may be slackening of supply. So typically, inflation can be either demand-pull inflation or supply constraints inflation. Sometimes, due to natural calamity, the market face slump in supply of goods and prices shoot up, sharply leading to inflation. Heavy hailstorm has pumped the inflation to more than seven per cent in China. But inflation of this type may be of temporary nature. However, reports of Chinese authorities, battling higher inflation even after months, are still coming.
On the other side, supply side problems are blamed for high inflation in our country. Inflation in India is slowly creeping up and recently it was reported at 7.41 per cent, which is very high from Reserve Bank of India’s (RBI’s) comfort level of inflation. Showing the concern of higher inflation, RBI chairman, has told in one of his speech that inflation mostly hit the poor and those who earn non-indexed income. Whatever benefit government is distributing to the poor, higher inflation is eating out most of it. Concern of RBI, regarding high inflation, is valid.
European currency, Euro, has appreciated 18 per cent against the United States Dollar (USD). The region is facing highest inflation for the last 14 years. As per European Central Bank (ECB) president, Jean Claude Trichet, “Europe’s inflation was above ECB’s two per cent limit for most part of the year in 2007. To fight the surging inflation, the bank has kept ECB’s main rate unchanged at four per cent since August 2007. During the same period, Federal Reserve System (FED) has cut the interest rate six times and brought it to 2.25 per cent this month.”
Apparently, Trichet has not bow down to the American pressure of aligning the interest rate in the Euro region with that of America. But Euro region is facing the burnt of appreciating Euro and the region’s export is being hit adversely. Difference in interest rate to the tune of 1.75 per cent may further mount upward pressure on Euro and worsen the export from Euro region.
Amidst high inflation, there are some countries having opposite trend of low inflation rate. Brazil is such a country, which registered fall in inflation in recent month. The annual inflation in Brazil in mid-March has slowed down to 4.55 per cent from 4.74 per cent in mid-February. It should also be noticed that the stock market of Brazil has also performed well in the last two months, contrary to the worldwide indices that were melting during the period. Out of Brazil, Russia, India and China (BRIC) countries, performance of Brazil in financial sector is different from rest of three countries in last several months.
In such a scenario, what will be the step of RBI in near future to combat the inflation will be worth seeing. Chances of lowering the policy rate (i.e. any of the bank rate, repo rate or reverse repo rate) by RBI appear to be very remote. Contrary to curb the inflation, the RBI may hike these rates. Tightening of reserve requirement by banks (read CRR) cannot be ruled out. Supply of dollar, due to sub prime crisis, is also restricted and Corporate India is finding it difficult to get fund from abroad to minimize the cost of borrowing. In such a scenario, corporate have to depend more on domestic banks and rupee resources, which may increase the cost of borrowing, ultimately affecting the corporate performance.
Comments