How to Stabilize Prices
Context:
- The RBI’s own forecasts indicate that inflation will slightly rise in the second quarter. Given the current situation, the MPC, which will convene in the second week of August, should continue to give price stability priority.
Introduction:
- Central banks in major economies tightened monetary policy last week to keep up the fight against inflation.
- Thanks to the US Federal Reserve, the federal funds rate rose by 25 basis points on Wednesday, reaching 5.25–5.5%, the highest level in 16 years. The following day, the European Central Bank also raised interest rates by 25 basis points.
- The Bank of England, which will meet this week, is also expected to follow suit.
Inflation:
- By tracking the average price change over time, inflation is calculated using a basket of goods and services. It refers to the rise in costs for the vast majority of goods and services that are consumed daily or on a regular basis, including necessities for the home, clothing, food, housing, entertainment, and transportation.
International interactions:
- The US economy has so far proven to be more resilient to tighter policies than expected. With annualised growth of 2.4% in the second quarter (April to June), it surpassed expectations.
- The unemployment rate stayed at a record-low 3.6% for the week ending July 22, despite a decline in claims for benefits. The consumer price index also shows that inflation decreased from 9.1% in June of last year to 3% in June.
- In contrast, the European economy has not been particularly strong.
- In its most recent update of its global economic forecast, the International Monetary Fund upped its growth projections for France, Italy, and Spain, but it anticipates a decline in Germany this year. The inflation rate in the Eurozone is still much higher than the target, albeit having dropped from a peak of 10.6% in October to 5.5% in June.
RBI’s Regulations:
- The monetary policy committee of the RBI has previously opted to maintain rates and the current posture. The rate of inflation in India has decreased; it was as low as 4.3% in May before only slightly rising to 4.8% in June.
- There are indications, nevertheless, that July’s headline inflation rate will have been much higher due to the rise in food prices, notably those of vegetables.
Conclusion:
- The RBI’s own forecasts indicate that inflation will slightly rise in the second quarter. Given the current situation, the MPC, which will convene in the second week of August, should continue to give price stability priority.
