Warning! Even as RBI cuts rate, retail inflation threatens to hit double digits

With the Reserve Bank of India cutting its main policy rate - the repo rate - by 50 basis points, concerns have grown about its impact on inflation.And if consumer price inflation is anything to go by, the economy could soon be in very serious trouble.

Consumer prices rose 9.47 percent in March from a year ago, higher than the previous month’s reading of 8.83 percent, according to government data.Given that food prices are on the climb again and a fuel price is imminent, it’s a safe bet to say that consumer price inflation could hit double digits soon.

Indeed, on a seasonally-adjusted basis, we did that already last year. This Firstpost blog notes that seasonally-adjustedCPI hit double-digits in September last year and continues to remain high, even though the pace of growth has moderated.

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However, there’s no reason to cheer because inflation is far from conquered. While the worst of double-digit inflation seems to have ended, the blog says that “we are not inside the target zone of four to five percent, and neither are we likely to achieve this in the rest of this year. It would be unwise to declare victory over the inflation crisis, with this information set in hand.”

One reason for that, the post points out, is that households have now lost faith that inflation will ever be reined within the 4-5 percent target zone. That feeds on higher inflation expectations for the future.

Several other factors also threaten to fuel inflation higher: soaring global crude oil prices, a weakening rupee, a hike in service tax and excise duty and a possible fuel price hike. Coal and power prices are also long due for price hikes, which will only add to consumer bills.

Under such trying circumstances, the RBI’s rate cut doesn’t help.A 50 basis point cut in the repo rate will likely increase demand in the economy and if supply does not increase to match that, prices are likely to rise further.

Looks like we’ll just have to get used to higher prices now.