Inflationary Pressures in South Asia

The similarities yet differences across South Asian countries, and their differential response to recent food and oil price shocks, gives a useful opportunity to better understand the structure of inflation in these economies. Analysis of the internal and external balance and evidence on demand and supply shocks implies output is largely demand determined but inefficiencies on the supply side perpetuate inflation. Procyclical policy amplifies the negative impact of supply shocks on output. Inflation surges are reduced at high output cost while propagation mechanisms and well-intentioned administrative interventions turn relative price shocks into chronic cost-push inflation. The analysis brings out the importance of food prices for the inflationary process. It is necessary to protect the poor from inflation and especially food inflation. But it must be done effectively. The paper concludes with analysis of effective short and long run policy options.