Inflation could spur shift in stance

Why in the news ?

• Monetary Policy Committee (MPC) of RBI is likely shift from its current ‘neutral’ policy stance to a ‘withdrawal of accommodation’ stance if headline inflation projection for the year ahead remained well above the target.

More on news

• The next few months of inflation and growth data will be key to determining the evolution of policy rates.
• If growth remains robust and inflation prints continue to project headline inflation a year ahead well above the target, then a change in stance from “neutral” to “withdrawal of accommodation” might have to be considered
• MPC in its last meeting  had kept interest rates unchanged, while maintaining a neutral stance.
• Since the economic recovery was at a nascent stage, a cautious approach was needed at this juncture.

Headline inflation and Core Inflation

• Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.
• Core inflation on the other hand excludes the highly volatile food and fuel components and therefore represents the underlying trend inflation.
• The trend inflation drives the future path of overall inflation. Hence, even when food and fuel inflation moderates over time, persistently high inflation in non-food, non-fuel components poses an upward risk to overall future inflation, creating challenges to monetary policy.

Source

The Hindu, The Mint.