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Confusion with Inflation
Context:
- The latest Consumer Price Index data shows headline that retail inflation has decelerated to a record low of 1.54% in June, 2017.
The difficulty:
- The reading has slid below the 2% lower bound of the Reserve Bank of India’s medium-term target for CPI inflation has understandably led to calls for the RBI to support economic growth by cutting interest rates.
- Core inflation, which strips out the relatively volatile food and fuel prices, has also trended lower and eased below 4% for the first time in at least five years.
- Economists have openly questioned the assumptions made by the majority of the members of the RBI’s Monetary Policy Committee with regard to prices and have urged a reboot of the policy rationale.
- They have also flagged concerns about “deflationary trends” and the risks of relying too heavily on forecasting models.
- Fiscally expansive measures taken by several State governments to address farmers’ demands for debt relief could pose a “tail risk” by triggering generalised inflation over time.
