Here's how inflation will affect economy and market

The wholesale price index (WPI) inflation rose to 6.1 percent for August from 5.79 percent. CNBC-TV18's Executive Editor Latha Venkatesh explains what the data means to the economy and the market.

Q. What does the renewed spike in inflation mean?

A: It is largely because of vegetable prices. Prices of vegetables rose 15.3 percent month-on-month; onions alone rose 51 percent. This part of inflation may also reverse quickly. What isn't reversing for many months are the prices of cereals; especially rice.

Q. Should the market be worried about it?

A: Yes. The markets should worry about inflation. The high food inflation ties in with the high CPI or consumer price inflation. What's worse is, this can't be solved by interest rates. It requires a slowing down of the fiscal transfer of money in the form of NREGS (National Rural Employment Guarantee Scheme), minimum support prices (MSP) and the food security transfers.

Also, the problem can be solved only if structures are put in place to improve farm-to-fork delivery and APMC (Agricultural Produce Market Committee) rules are changed.

Q. Which is a more import indicator of inflation, wholesale or retail?

A: Both are important. Retail, is more important since it indicates how much the consumer is hurt.

Q. What is the near term trend in WPI likely to be?

A: September too may be bad, but not as bad as August. October, November, and December are usually good months for food inflation; it falls or at least plateaus. But, one cannot be too sure as we are getting averse numbers, month after month.

Q. What impact, if any, is the Fed decision likely to have on inflation trend in India near term?

A: Fed decision will impact through the rupee. If Fed stops printing more dollars, rupee could depreciate, this will increase inflation a bit. But, our inflation is driven largely by domestic factors.

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