India is facing a policy dilemma. Inflation is high, and the economy is weak. What to do?
The new governor of the India's central bank, Raghuram Rajan is a leading macroeconomist from the University of Chicago business school. His answer: inflation is a bigger problem. So the central bank is raising interest rates.
Inflation in India is 9.5%, extremely high by current standards. The Reserve Bank of India decided that inflation is now a more pressing issue than output and, if it is not adressed now, it will become a bigger problem in the future. We have seen this in Canada in the early and in the late 1980s, when two recessions were caused by anti-inflationary policies of the Bank of Canada.
Question: The new interest rate is 7.5%, the inflation rate is 9.5% so the Reuters journalist concludes "the cost of living is rising faster than interest rates." Is the journalist right?
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