How is one to view inflation today? Inflation coming down does not mean that prices are falling. It is just that prices are increasing at a lower rate. This has to be made clear because often there is jubilation that inflation has come down when households are still paying higher prices for their groceries. Therefore, when the RBI says that it is targeting an inflation rate of 4% or the Fed 2%, the implication is that there is some element of price increase which will happen every year and this number is considered to be acceptable.

In the last credit policy, the RBI had provided forecasts of inflation getting to less than 4% in the second quarter which is July to September. But it is expected to increase to the region of 4.5% in the next two quarters. How is one to read these numbers?

All models used in forecasts are based on past relations as well as assumptions made on certain variables for the forecast period. This is where the commonly used phrase ‘base effect’ comes in. When inflation in July-September 2023 was high at 6.4%, it provided a cushion for the present number. The other factor which is taken into account is the present state of prices. The persistent problem today is rising food prices which has kept food inflation elevated. It has averaged 8% for food and beverages group. Here too the base effect is there as it was 4.1% last year.

But the four products which are creating havoc in absolute terms are tomatoes,........

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