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Opinion

The Cure for High Prices…

…is high prices.

I got that headline from a recent newsletter by John Mauldin and it’s relevant today as oil companies say they will raise petrol prices by Rs. 3 per liter after May 10 (elections).

While this is bad for short term prices and for inflation measurements, this is really the only thing that will cure overheated prices. We can’t live with subsidised fuel forever – the only to make us reduce our usage, and thus reduce overall demand is to make it expensive for us.

Yes, there is some speculation driving crude prices up. Yes, the troubles in the middle east are a problem. But prices need to go up to compensate. Like Mauldin says:

The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat.

But it will involve short term pain. And I think the equity markets will be very badly hit, because we will have to slow down to perhaps 6% or lesser growth just to compensate (unless we fudge the data). Either ways, it’s a rough road ahead.

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