CIAO DATE: 03/2012
January 2012
Compared to immediately preceding years, that is, its own recent history, India’s inflation became unhinged (thereby reversing creditable performance) from as far back as 2006. In the last two years, among its major comparators India has the highest rate of consumer inflation; it is also volatile in relation to its peers in Asia and the BRICs. This paper puts forward an empirical framework to analyze the time series and cross-sectional dynamics of inflation in India using a large panel of disaggregated sector prices for the time period 1994-95 to 2010-11. It has been motivated in no small part to official pronouncements seemingly unencumbered by methodological rigor. There are several grounds for distrust by citizens regarding policy makers in this context. Firstly, officials have attributed the upswing in prices (measured by all indices) to food supply constraints, and therefore claim they are powerless to do anything about it. Secondly, they resort to hand wringing and public communication that essentially amounts to “we are staring the problem down” as the common refrain for an inordinately long time; in tandem, rolling “(mental) spreadsheet forecasts”—that have been optimistic by some distance—were, and still are, put out at regular intervals to give succor and hope to the public. Thirdly, a spate of recent statements seems to suggest that the medium-term objective of around three percent inflation articulated by inter alia the Reserve Bank of India (RBI)3 is being given a quite burial.
Resource link: Dynamics of Inflation "Herding": Decoding India's Inflationary Process [PDF] - 1.3M