Thursday, July 3, 2008

News has just 'flown in' that Inflation is up to 11.63 % !! With the world heading towards recession, and oil prices booming, inflation is bound to come. RBI responded last week by raising repo rate from 8% to 8.50%. The Reserve Bank also hiked the CRR (percent of deposits of banks kept with RBI) to 8.75% from 8.25%.

The G8 countries are to meet soon and obviously, this growing inflation will be on everyone's mind. Moreover, World Bank president Robert Zoellick has urged the G8 nations to work in tandem with OPEC countries to reach some decision/action to curb rising oil and commodity prices. ECB has already taken the bold step of raising interest rates from 4% to 4.25% to curb inflation(which has touched 4% in Europe - a high value, keeping in mind, their target of 2% inflation).

But are these measures enough?? Inflation has more factors than just a single-dimensional reason of interest rates. Take for instance, oil prices. Supply Demand are not the only essentials to it...even increased output did not push down prices, as I had written 2 weeks back.

Food crisis is also fueling rapid inflation. Prices of rice and wheat globally have gone up atleast by 2 times. Most developing countries were hit, with the African nations being the worst-hit victims. Food crisis was also not only triggered by increase in consumer demand in India and China, but by global practices of food use. Per capita food consumption have actually decreased in India and China.

Read more on the food crisis and also effects of truck strike on Indian economy and increasing inflation >>

This natural balance between demand and supply was hit primarily by using cereals like corn/maize and sugarcane for making bio-fuels like ethanol for use in petrol/diesel. USA use nearly a third of their maize production only for making bio-fuels. Adding bio-fuels enhances petrol/diesel in cars and vehicles and helps bringing down actual rates. Rising oil prices only mean that this figure[of usage of bio-fuels] is going to spiral up, as it already has since 2005-06 when it was just 6%.

I suggest that if countries are to protect themselves from food crisis, they are to isolate themselves from global markets in food and be self-sufficient in domestic production. Managing security of surplus of food-grains is really, really difficult for our Indian govt. since food grain production is increasing at a minuscule rate of 1 percent yearly.

I guess i'm ending on an abrupt note here. Please post your comments here or cast your vote!!

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