WPI inflation is up to 6.68% and the government is ready to do battle.
I wrote an article in Business Standard titled How to combat inflation where I suggest that the way to bring monetary policy back to balance is a 10% rupee appreciation coupled with a 300 bps drop in the short-term interest rate.
In this reasoming, I think the drop in the US dollar is important in understanding the global rise in commodity prices. As Ashok Gulati and Kanupriya Gupta say in Hindu Business line:
Our humble submission is that before any policy prescription is offered; let us get the diagnosis right. While most of the factors that these studies talk about are right and appropriate, many of them compare 2007 prices with those in 2000, and that too in current dollars, to arrive at their conclusion of gloom.
This, we opine, is not appropriate, if not misleading. The reason is simple: anyone dealing with agricultural prices knows that agricultural prices in 2000 were at their rock bottom resulting primarily from the East Asian crisis. No one expected those prices to stay at those levels, as East Asian economies started to recover. Maybe the pendulum has now swung a little on the other side.
Another reason is that 2007-08 prices need to be put in a long-term perspective, say at least from 1990 to 2007. And when one does that, the minimum one needs to do is to take the prices in constant US dollars. One can take the base year as 1990, or 1995, or even 2005, for converting the price series into constant US dollars, but not the year 2000, for the reasons explained above.
However, in a situation when US dollar is fast losing its strength in the international exchange market, it may be more appropriate to look at prices in constant euros (with base year of 1990, or 1995 or 2005).
We have done this exercise for the major agricultural commodities such as wheat, rice, palm oil, and sugar, at constant 1995 US dollars as well as at constant 1995 euros. And the results are revealing (see Graphs).
The upshot of these results is: the 2007 global prices of agricultural products are not very much out of line with what they were in say 1996, just before the East Asian crisis. These prices started rolling down in 1997 due to East Asian crisis, touched a rock bottom in 1999-2000, and then recovered over time. Today, they are a little on the other side of the swing.