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Category: Societal Issues

Date Submitted: 11/15/2011 09:57 AM

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Effect of inflation on us STARTING

We all have felt the pinch of escalating prices during this festive season. Life has not been very easy this year due to rising inflation. The overall cost of goods and services is increasing because of inflation. To tame inflation, the RBI has been raising key rates. The wholesale price index (WPI), consumer price index(CPI) or food inflation are different facets of this simple economic indicator known as inflation. Inflation reflects the value of money. It is measured on a basket of commodities. Food products are only one component. If other components fall and food items keep rising, inflation will still show an overall fall. It measures how much the rise is over time.

Has the central bank’s monetary tightening harmed growth instead of taming inflation?? The RBI has raised key rates 13 times and by a cumulative 375(yet to be confirmed) basis points since March last year but has not managed to completely tame inflation, which remains too high. July inflation was at 9.22% and estimates for headline inflation remain was as high as 9.7% for August. Headline inflation for September remained elevated at 9.72%, Inflation, as measured by the Wholesale Price Index, stood at 9.78% in August.

The chief domestic concern for the economy is currently the high level of interest rates and inflation. Elevated interest rates have slowed down the economy and are impeding investment. Will the Reserve Bank of India (RBI) continue to raise its policy rates? How much growth is it willing to sacrifice to tame inflation? Above a certain level, inflation starts to hurt growth and there’s no trade-off between inflation and growth—the only objective, at these high levels, would then be to reduce inflation, without bothering about growth. That’s exactly what the RBI has done.

Effect of Inflation

 Inflation has an adverse impact on private investment, because price signals become distorted, leading to misallocation of resources....