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Charts & Analysis

Consumer Prices Go Up at a Scary 9.84% in Sep 2013

Consumer Price Inflation for September was a huge 9.84% as policymakers struggle to find out what makes prices keep going up and up. The answer, in my opinion, is to raise interest rates to 12%, 15% or whatever it takes to break the back of inflation. That is unacceptable, because it will hurt growth, they tell us. But growth of this sort is just a waste of time – 9% GDP growth with 9% inflation is just stupid.

The drift between the CPI and WPI continues to be wide but has narrowed just a little bit, after today morning’s print of 6.6%.

WPI and CPI

Rural Inflation has now started to catch up to the double digits that CPI is at in the cities:

CPI urban and rural

And finally, a look at the components:

CPI Components

What this tells us is that the critical components of our lives – food, transport and housing – are in spiralling out of control, and while the numbers are marginally lower than earlier in the case of food, the 11% number is simply too much.

What we need is the will to control this inflation. You could argue that interest rates don’t impact inflation because it’s supply side, or driven by NREGA or something like that. I think that is bullshit.

There is no shortage of supply of food, in any real sense. Fuel prices are actually lower than what it should cost us because of subsidies. Interest rates do impact food hoarders and governments (who is the biggest food hoarder) and unless we make it really difficult for them, inflation will not ease. In the process, the collateral damage has to be the economy temporarily.

If we bite the bullet today, we’ll have a better tomorrow. Rajan at the RBI is young enough to be able to see the fruits of inflation control, though almost none of our politicians are. It’s not clear if his stance will be to hike rates, but I believe he should, and strongly so. And, he needs to contract the RBI balance sheet and cut liquidity – something he’s simply not doing.

This is just another piece of news that doesn’t change anything – and markets will continue to go up because no one cares. Until everyone has to.

  • Leo says:

    that is the only way to get stable system just shock it and raise rates .Let the defualters go to hell.Real estate crazy maniacs.FOod inflation is coz of realty and other land dealing.
    I see advertisements where they say buy this land that land.I mean there is no reward for saving.
    If they dont do it just the like the rupee mkt will do it fo ru 16 20% rates will be killing deflation .12 % is better than 16 20% .
    But will he bite the bullet ?

  • mangoman says:

    Supply side BS is the convenient reason for the crooks and beneficiaries. The real problem is real estate and banks.
    Along with real estate whatever hikes you advocate would also take down the banking sector along with it. Many middle class mangoes who invested at sub-standard apartments at inflated prices would be furious at RBI/Govt.
    So it wont happen. Govt / RBI may live with high inflation than the other alternative

  • px says:

    In the Indianomics interview , Rajan clearly hinted that he was no volker ! All we can do is see how he acts / reacts to events and news flow.
    Secondly the world CBs , would not follow that policy either, esp USA with Yellen another inflation dove at the helm, who would keep rates zero for the next decade if she could !
    Ajay Shah has in a post mentioned the breaking of social contracts when inflation shoots up and wants a figure lower than 4% as optimum, and that is precisely what has happened in India.
    I dont think he will increase rates at least till near election time.

  • Nishit says:

    That means increasing the home-loan rates as well, but politicians, builders don’t want that, do they? Especially when real-estate is only held up because of their nexus.

  • Raju Mandal says:

    I think this whole situation is a catch – 22 situation of sorts. Reducing CAD has become a great window dressing exercise by controlling Gold imports and tinkering with petrol and Diesel prices every now and then.Though this will reduce import of petrolieum but is creating havoc with the domestic industries by stroking inflation and reducing the competitiveness of indian companies. This will only go on to further increase import of chinese goods in future and widen CAD.The current surge in inflation have more to do with the mindless petro prices hikes than monetary policies of the RBI.

  • Leo says:

    well well well the surprise package is coming… 12% on 10 year will freek everyone on indian GSECs,
    Green signal will come once the US 10 year moves up fast.Till then it is a waiting game.Coz lungi and his crooks wont leave the mkt collapse .See the pumping in IT shocking.Is it that good out there ? i heard from my friends in the business that things are bad.
    U need a trigger like bear sterns or lehman now .Bond bubble blow up above 3.2% yield to 8% or more would be a sight to see.We are almost close but just not happening.The no taper talk was that Fed is afraid of the deficit going out of control.So it should start like 1929 september october