It is panic for everyone

Inflation is on its highest mind-boggling 11 percent and many predict it will go up further. The middle class people those who start budgeting there expense before money comes in there hand. When the prices of essential things go higher, it adversely affected the middle class and poor people.

Current inflation is a global phenomenon and almost every country is suffering from it. The Goldman Sachs index of commodity price has been doubled since early 2007. Nominal price of oil increased by 150 % over the same period. In simple the global economy is just not producing enough to meet the rising world demand.

Some time ago the U.S president earned instant notoriety because he blamed China and India for the rise in food price. But there is a grain of truth in his statement. Emerging and developing countries have been growing very significantly faster than the rest of the world and there has been a steep increase in demand in these countries. This has been the major cause of the rise in the world demand because the economies of most developed countries have been stagnating.

Since there is no reason to believe that the world production will rise miraculously at least in near future, many people expecting that the price will keep on rising. And these expectations motivate the inflationary process. This cause trader to withhold stocks from the market in the hope to being able to sell these at higher price later on.

If government increase the domestic supply by importing food, will cause revenue loss as the price in international market is higher. At this time the credit policy becomes crucial. The Reserve Bank has to raise the interest rate and may also put restriction on the supply of credit. These measures will dampen overall aggregate demand in the economy by increasing the cost of burrowing, higher the cost of burrowing also discourage hoarding since the cost of maintaining the stock will become dearer.

Desperate time call desperate measures may be the time has come for the government to buy small quantity of food grain from the world market. This is an extremely costly option as the price is higher in the world market. The act of importing food will signal the domestic trader that the government is determined to curb the price; this in turn may induce the trader to release the stock because of the fear of making loss.

Of course the government will have to incur heavy loss on the food grain import because that food grain will sell at considerably lower cost than that of the imported price. It is important to subsidized basic food items which are consumed by the masses rather than the petroleum product which is only consumed by the richer.

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