CPI inflation

INDIA - In Brief 14 Jan 2021 by Ila Patnaik

Through 2020, a great debate had raged on the question of inflation and the inflation targeting regime.Under the inflation targeting regime, headline inflation (i.e. year-on-year CPI inflation) is required to stay between 2 and 6 per cent. In December 2019, the bound was breached, when inflation reached 7.36 per cent. In the 12 months from December 2019 to November 2020, there was only 1 month (March 2020) where the value at 5.84 was within the 2-to-6 range.While India graduated to inflation targeting in February 2015, many people continue to hanker for the old ways, where the central bank followed a system of multiple indicators, multiple objectives and multiple instruments, which roughly speaking meant that the central bank could do as it pleased. There was a significant campaign around some variant of the following line of thought: "It's obvious that the economy is in trouble in the pandemic, but inflation is stubbornly high, this proves that inflation targeting is a bad idea, this is the time to change the monetary policy regime". The present authors understood early on that there was a one-time blip in month-on-month inflation in November 2019 and December 2019. This would influence the year-on-year inflation for the coming one year. By the time we get to 2020 December, this blip would be out of the picture. After that, headline inflation would reflect genuine economic conditions, which are a combination of soft demand with some supply dislocations. Hence, there was no need to get worried about the high headline inflation of the post-pandemic period. Many reports written in 2020 have been based on this intellectual framework.Yesterday, there was a data release for...

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