Inflation – Inflation, as everyone understands, is the key economic term which talks about the gap between supply and demand. The rate of inflation for example at 4% means the price of products will go up by 4%.
Inflation is again of two types they are
CPI – Consumer Price Index – Inflation that is measured at the point of Purchase.
WPI – Whole Price Index – This is the supply side Inflation where it deals with measuring the inflation at the point of production.
CPI figures come out at 3.65% for the month of Feb-17 which looks decent and under control of RBI but consider the point that CPI last month was at 3.17%. Keeping aside CPI for some time let’s move onto WPI. WPI numbers come at 6.55% for Feb-17 which is the highest in last 18 months. The gap between the CPI and WPI inflation is 2.88% which is a very big difference for any country.
Always for the economy, CPI is found to be more than WPI but for last few months, the WPI in India is found to be more than CPI.
So, which is better?
CPI greater than WPI or WPI greater than CPI.
WPI as understood is the supply side inflation where it decides how much to produce based on demand. The increase in WPI inflation means actual supply is lesser than the expected supply. The reasons are completely depended on the economic conditions at that time. CPI inflation is higher when there is not enough supply to meet the increasing demand.
To understand it clearly supply happens in the form of production and moves to the point of purchase that is CPI. If there is a change in the demand that increases the inflation in CPI. The increased demand triggers increase in supply at WPI and keep the inflation at WPI lower. So, a higher CPI always encourages higher production and higher production triggers higher GDP growth.
A Higher WPI inflation means lower supply and the lower supply means lower growth and lower GDP.
How do you increase the Supply?
Your supply will be more when the interest rates are lower. This is because at the lower interest rates the cost of production will be lower and you can make profits by producing more. So, WPI should always be lesser than CPI.
But Why WPI came at 6.55% and CPI came at 3.65%? Whom to Blame?
This is because of no rate cut decision was taken by RBI in the last monetary policy. RBI did not go for a rate cut and lost the chance of increasing the supply. The reason is RBI was worried rate cut would increase the demand at CPI. This will further increase the inflation if supply doesn’t go up. But now also inflation is increasing from WPI side because of lack of supply.
Thus, RBI not decreasing the interest rate did not serve the purpose.
What should be done on next RBI policy on 5th April?
I want RBI to wake up and cut the interest rates by least 50basis points. This decreases the interest rates to 5.75%. It will also boost the stock market which is at an all-time high. RBI should stop worrying about Crude oil prices and demand worries.
To conclude Nifty has already reached its all-time high after Modi wave in UP elections. Now it’s the time to take it to a higher level by improving the macroeconomic fundamentals. If this happens I’m sure we will celebrate this Diwali with a 10,000 on Nifty.