Inflation has external causes

Apart from the trends in imported core, the trends in domestic core deserve a special mention. Domestic core prices were getting increasingly aligned with the international trends in commodity prices (see Graph 2) with the passage of time, reflecting a progressive pass-through of input costs.

For example, over the entire period (April 1995-December 2012), the correlation coefficient between the Reuters CRB Index and the non-imported core was negligible, but this increased to 0.33 (April 2004-December 2012) and further to 0.72 (April 2008-December 2012). Clearly, not only imported inflation, but even domestic core inflation was being driven by exogenous factors (gyrations in global commodity prices). It may be noted that RBI had started increasing rates from March 2010 onwards in an effort to control spiralling inflation.

Apart from international factors, there were also some domestic factors that were responsible for price increases, but that could not have been controlled by RBI. It is well-known that food prices have been at elevated levels for a long time, and given that

... contd.