Q: What is driving inflation and prices?Ajit Ranade: Inflation is caused by demand pull (even Bush said that Indian and Chinese middle class demand is driving food inflation). The global demand pressure is manifest in China's relentless demand for all sorts of commodities from steel, cement, metals, oil, edible oil etc. From 2002 to 2007, the world had an unprecedented uninterrupted growth phase, powered by growth in china, India and the US. Even in the bad year of 2007, when the sub-prime crisis broke, the US GDP was one of their best.
The second cause of inflation was the relatively lose monetary policy worldwide. Of course, the US started tightening in mid-2004, and so did the RBI in late 2004. But maybe, it was too hesitant and not harsh enough. So long as lose money was pouring into equity and real estate, it wasn't a concern, certainly not for the political class. But the seeds of 2008 inflation (WPI-based) were probably sown in the asset inflation of the previous three years.
The third cause of inflation, probably the least important, is the activity of speculative hedge funds in commodity markets like oil.
Courtesy : India Today
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