Inflation And The Economy

Inflation is rising around the world. Why didn't central banks see it coming?

- Puja Mehra

Everything is becoming expensive.

Inflation is out of control. Central banks around the world are accepting that they were wrong to dismiss it as 'transitory' all of the last year. In advanced economies, central banks have said transparently that they made mistakes and while they see that inflation is adding to people's hardships, they don't have a magic wand to provide relief. In India, the central bank hasn't as yet accepted that it too erred. It's looking to blame everything from COVID to Russia's invasion of Ukraine, the US Federal Reserve, and the high taxes on petrol and diesel prices, but not look at its own policies. Why is the RBI deflecting blame?

Under the RBI Act passed by Parliament, the government has given the central bank the target to keep inflation at 4 percent and not let it cross 6 percent. If inflation crosses 6 percent and stays above that higher tolerance level for three quarters continuously, the law requires the RBI to explain in writing why it failed and what it plans to do to control inflation.

Russia's war, the increase in food and fuel prices, and the global inflation are no doubt aggravating inflation but inflation was high in India much before these events increased prices, already high, even more. Inflation was around 6 percent back in 2019, before the COVID outbreak. The average inflation rate was 6.2 percent in the fiscal year 2020-21; it continued to rule high for much of 2021-22. According to the latest government data, it was just under 8 percent, or twice the RBI's target of 4 percent, in April. And is expected to remain above 6 percent for months.