THE HINDU Editorial Vocabulary-July 14, 2017- Topic 1

Inflation conundrum

On the record low retail inflation

The latest Consumer Price Index data show headline retail inflation has decelerated to a record low of 1.54% in June. That the reading has slid below the 2% lower bound of the Reserve Bank of India’s medium-term target for CPI inflation has understandably led to calls for the RBI to support economic growth by cutting interest rates. 

Economists, including Chief Economic Adviser Arvind Subramanian, have openly questioned the assumptions made by the majority of the members of the RBI’s Monetary Policy Committee with regard to prices and have urged a reboot of the policy rationale. Core inflation, which strips out the relatively volatile food and fuel prices, has also trended lower and eased below 4% for the first time in at least five years. And with the latest industrial output data from May reflecting weaknesses in key sectors like capital goods and consumer durables, the reasoning behind demands for monetary action that could help spur both investment and consumer demand is evident. Others have also flagged concerns about “deflationary trends” and the risks of relying too heavily on forecasting models. The voices exhorting the central bank to reduce interest rates are only going to grow ahead of its next bimonthly policy review at the beginning of August.

For the six members of the RBI’s rate-setting panel, including Governor Urjit Patel and his deputy overseeing monetary policy, Viral Acharya, the data pose a conundrum that is going to test their sagacity. For one, the beneficial base effect will begin to reverse after peaking in July. Also, the majority of the risks to the inflation outlook that the committee’s participants had flagged collectively and individually at the last meeting in June, when they had opted to sit pat while retaining a neutral stance, are still largely relevant and yet to play out. The impact from the July 1 introduction of the Goods and Services Tax, for instance, will begin to feed into prices only over the coming months — based on the initial anecdotal trends in the prices of various services, there could be upward pressure on core inflation. Similarly, the payment of increased allowances under the Seventh Central Pay Commission’s award, which came into effect from the beginning of this month, could also start to transmit into price gains. As Mr. Acharya had pointed out at the last meeting, fiscally expansive measures taken by several State governments to address farmers’ demands for debt relief could pose a “tail risk” by triggering generalised inflation over time. And the restoration of the health of the banking sector, a key caveat for ensuring effective transmission of monetary policy, is as yet far from being close to a fruitful outcome. Ultimately, the RBI will have to weigh whether the current trend in inflation is likely to remain durable enough for it to make a move that doesn’t end up proving to be a costly error in the long run.

Vocabulary

Slid: move along a smooth surface while maintaining continuous contact with it.

Example: She slid down the bank into the water

Synonyms: glide, move smoothly, slip, slither, skim

Assumption: a thing that is accepted as true or as certain to happen, without proof.

Example: They made certain assumptions about the market

Synonyms: supposition, presumption, belief, expectation

Urged: try earnestly or persistently to persuade (someone) to do something.

Example: He urged her to come and stay with us

Rationale: a set of reasons or a logical basis for a course of action or a particular belief.

Example: He explained the rationale behind the change

Synonyms: reason(s), reasoning, thinking, logic, grounds, sense

Spur: a thing that prompts or encourages someone; an incentive.

Example: Profit was both the spur and the reward of enterprise

Synonyms: stimulus, incentive, encouragement, inducement

Exhort: strongly encourage or urge someone to do something.

Example: The media have been exhorting people to turn out for the demonstration

Synonyms: urge, encourage, call on, enjoin, charge, press

Conundrum: a confusing and difficult problem or question.

Example: One of the most difficult conundrums for the experts

Synonyms: problem, difficult question, difficulty, quandary, dilemma, poser

Anecdotal: not necessarily true or reliable, because based on personal accounts rather than facts or research.

Example: While there was much anecdotal evidence there was little hard fact

Outcome: the way a thing turns out; a consequence.

Example: It is the outcome of the vote that counts

Synonyms: result, end result, consequence, net result, upshot