Pricing Power Behind High Inflation?

Why central banks such as RBI need to look at high prices charged by dominant firms instead of focusing on higher repo rates only

- Prasanna Mohanty

RESERVE BANK OF INDIA (RBI) kept repo rate unchanged at 6.5% in its latest monetary policy despite consumer price inflation (CPI) staying above its 6% target in January and February, even though March CPI came in at 5.6%. RBI’s logic: Inflation is expected to moderate in FY24 and monetary policy actions it has already taken are “still working through the system.” RBI governor Shaktikanta Das explained: “It’s a pause for now, to assess the progress so far, and MPC wouldn’t hesitate to raise the rate if and when required.”

RBI, in fact, stood out among world’s major central banks in announcing a pause in the rate hike cycle. U.S. Fed (despite bank runs) and European central banks increased rates by 25-50 basis points recently to control four-decade-high inflation rates. In India, RBI’s assumptions have gone wrong for years, with January and February inflation (6.5% and 6.4%, respectively) coming in higher than its estimate of 5.8-5.9% for Q4 of FY23.

However, the fight against inflation has taken a twist in U.S. and Europe. More and more economists are calling it a “sellers’ inflation”—caused not by rising input costs like wageprice spirals of 1970s but companies using market dominance to increase prices. As this blunts the impact of rate hikes, RBI may have to tweak its strategy of increasing the repo rate to bring inflation under control.

Sellers’ Inflation