Millennium Post
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Economy headed from inflation to stagflation?

While November retail inflation galloped to a nine-month high of 11.24 per cent, making it almost impossible for the RBI to lower interest rates in next week’s monetary policy statement, October factory output, as measured in terms of the Index of Industrial Production (IIP), contracted by 1.8 per cent, mainly due to poor performance of the manufacturing sector.

This double whammy on the economic data front prompted several policy analysts, economists and corporate watchers to warn that the economy may have entered — or may be on its way to — a dangerous phase of stagflation. Stagflation, which first appeared on the global economic scene in the late 1960’s and early 1970’s, is defined as a combination of price inflation and economic stagnation.

The latest bout of inflation as measured by the consumer price index (CPI) was triggered by costlier fruits and vegetables such as onions and tomatoes. For the month of October, the inflation as measured by the CPI was revised upwards to 10.17 per cent from the preliminary estimate of 10.09 per cent.

Vegetable prices rose 61.6 per cent in November from a year earlier compared with a 45.67 per cent increase in the previous month, according to the government data released on Thursday. Fruit prices rose 15 per cent. Pulses were dearer by 1.2 per cent, cereals by 12.07 per cent and milk products by 9.06 per cent in November. The price rise of protein-rich items such as eggs, meat and fish was 11.96 per cent. Inflation in the food and beverages segment was 14.72 per cent compared with 12.56 per cent in October.

Inflation, which was in double digits for several months until March, declined to 9.39 per cent in April and came back to double digits in October. The latest data show that the provisional inflation rates for rural and urban areas for November were 11.74 per cent and 10.5 per cent respectively.

For consumer price index inflation, data are collected from select towns by the National Sample Survey Organisation and from certain villages by the Department of Posts. Data on inflation based on the wholesale price index is scheduled to be released on Monday. On Wednesday RBI Governor Raghuram Rajan had said that the central bank would comprehensively consider all economic data while deciding on the policy rate.
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