The Indian politicians and senior servants keep promising to the public that the current high rate of inflation is purely a temporary phenomenon and that the economy should be back on track with high growth but with low inflation rate. What we witness today is altogether different story. The Consumer Price index is steadily moving up. It has touched a high of 10.1 percent and the GDP growth rate is stagnating in the 4.5-5% region
RBI interpreting the current data on growth rate is predicting that the slow growth rate will generate disinflationary forces. There is no evidence of this. The logic they used is that the current weak economic force would create a weaker economy leading to lower final prices of goods and services.
What then is the issue. It appears as though that the expected inflation rate is deeply entrenched in the minds of producers and consumers. All these people continue to believe that the expected inflation rate will keep going up regardless of the demand supply equilibrium.
This solution is serious and need attention. Can Dr. Raghuram Rajan put on the shoes of Mr. Paul Volcker, a former federal reserve chairman and fight inflation with all the ammunition available. Mr. Paul Volcker pushed up the prime rate to 22½% in late 1979 in the US. This broke the back of inflation. Inflationary expectation is a serious disease that both producers and consumers assume that this will be trend of the future.
With this high levels of inflation, consumers are currently distraught and feeling helpless. Salaries are not keeping up with inflation and this has made a high dent on the savings available to the economy. They know that sooner or later the value of rupee against gold will fall and so many decide to shift their savings from banks to gold purchases and possibly real assets. Finally detailed study of why and how this inflation rate is moving up is essential before any concrete steps could be taken. In the meanwhile hope the consumers shouldn’t loose hope and drain the bank liquidity by shifting funds to gold and real assets.