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from Expert Zone:

Targeting inflation at 4 percent

Finance Minister Arun Jaitley seems to have finally taken the responsibility of targeting inflation as it is a sensitive political issue and could not be left to the discretion of the Reserve Bank of India (RBI). With CPI as the anchor, the target will be 4 percent measured annually (+/-2 percent).

Inflation has been a bone of contention for nearly three years now. The RBI has kept the repo rate a wee bit above inflation rate on the supposition that inflation will go down and growth will follow. But the finance ministry wanted the interest rate to be low enough to stimulate growth, which has almost halved in the past two years. The RBI had the upper hand in deciding interest policy because it enjoys autonomy and need not go by the insinuations of the finance ministry.

With a new government at the centre, perceptions have also changed. Picking on the RBI’s suggestion made way back in January, the finance ministry has proposed to decide the inflation target.

Surely, the government has an ear on the pulse of the people and can assess what level of inflation would be acceptable. An average of 4 percent inflation would mean that the repo rate would be 5-6 percent and bank credit 7-8 percent. That should create the right environment for growth.

from Expert Zone:

Why inflation is so persistent

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Inflation has been high for nearly four years and has not responded to the policies of the Reserve Bank of India or the central government. This is because the kind of inflation that we have is of an unusual variety and cannot be checked by conventional means.

It is important to look at the numbers. In July, the consumer price index (CPI) was up 8 percent and threatens to crawl up further after a deficient monsoon. That’s because 68 percent of the increase in CPI comes from food.

from Expert Zone:

Why the RBI raised interest rates

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Reserve Bank of India (RBI) raised interest rates at its review on Jan 28. The justification usually given for doing so is inflation.

But at its previous review, when inflation had soared, the RBI was passive and left rates unchanged. Now, with wholesale price inflation (WPI) slowing to 6.16 percent, the RBI was quick to raise the repo rate by 25 bps back to its highest level since the 2008 crisis. Why?

from Expert Zone:

Which inflation should the RBI target?

The Reserve Bank of India (RBI) is entrusted with the responsibility of maintaining price and financial stability, and it has used interest rate and money supply to pursue this objective with unwavering determination. Yet, inflation has survived with matching persistence.

The index that the RBI uses to target inflation is the wholesale price index (WPI), which is the combined price of a commodity basket comprising 676 items. A few prices in this basket can be too volatile or outside the scope of the RBI’s monetary policy, leading to poor results.

from Global Investing:

Chinese inflation – unreported retail

China's inflation print for June at 2.7 percent, a four-month high, was higher than forecast, but part of the picture could be obfuscated by a lack of accounting for the ever-growing online retail sector.

Gross domestic product figures have been consistently revised down this year from 8 percent to around 7.4 percent by July, with significant doubt over the reliability of official data. Some analysts forecast the more likely GDP print is around 5 percent, given the lack of punishment for falsifying local data and incentives for better growth figures for regional prints.

from George Chen:

China is still waiting for inflation to peak

By George Chen
The opinions expressed are the author’s own.

How time flies. It's already the end of August and speculations naturally arise about what China's inflation reading will be for this month.

The most optimistic view these days is that the August Consumer Price Index (CPI) could decline to below 6 percent. The most pessimistic view I've heard is that growth has slowed down in August, but probably only to 6.2 percent or 6.3 percent.

from The Great Debate UK:

Little chance of a rate hike until at least Q3

cr_mega_503_JaneFoley.JPG-Jane Foley is research director at Forex.com. The opinions expressed are her own. -

Bank of England Governor Mervyn King's speech this week was well timed insofar as it has nipped in the bud a growing fear that inflation in the UK could be lurching higher.

from Breakingviews:

China gets growth and a nasty dilemma

Chinese Premier Wen Jiabao once said 2009 would be China’s toughest economic period in fifty years. He wasn’t thinking ahead. In 2010, policymakers face a seemingly impossible mission – continuing 2009’s growth of 8.7 percent while curbing resurgent inflation. December’s figures show the government is already behind the curve.

The annual inflation rate for consumer prices was a seemingly mild 1.9% in December. But that number understates the threat. The consumer price index excludes the rapidly rising cost of property. And year-on-year changes miss the most recent trend. In the most recent month, prices rose 0.8 percent – a nerve-wracking 10 percent annualised rate.

from Global Investing:

Never mind the output gap

The inflation vs. deflation debate has livened up again following the jump in December's UK consumer price inflation (CPI) to 2.9 percent. Last year you couldn't move for economists harping on about the output gap and blithely dismissing arguments about imported inflation, rising commodity prices, and oh yes, the little matter of the money supply.

Indian inflation

Simon Ward, chief economist at Henderson Global Investors, takes the threat of inflation more seriously. He points out that the big swings in inflation in recent years have been driven by food and energy prices, and the latter are beginning to rebound sharply.

from The Great Debate UK:

Will inflation soar when QE is withdrawn?

MarkBolsom - Mark Bolsom is Head of the UK Trading desk at Travelex, the world’s largest non-bank foreign exchange and international payments provider. The opinions expressed are his own. -

The rise in November’s CPI figure was larger than expected, but not a total surprise and markets have largely ignored the data.

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