Raghuram Rajan warns that inflation peak yet to come

If you are an alpinist climbing Mount Inflation, the peak is still some distance away, according to terrain expert and former governor of the Reserve Bank of India, Raghuram Rajan.

Rising inflation across the globe has resulted in central banks raising key interest rates in an effort to fight it. Just this Wednesday, RBI Governor Shaktikanta Das announced the unanimous decision of the Monetary Policy Committee (MPC) to hike the key interest rate at which the central bank lends money to banks — by 50 basis points to 4.9 percent.

Now, all eyes are on the all-important US consumer price index (CPI) inflation data for the month of May which is due later tonight. Economists expect a yearly increase of 8.3 percent and core inflation to rise by 5.9 percent.

Rajan, who is now professor of finance at the University of Chicago - Booth School of Business- said, “I think there is a case to be made that there are still some effects of, for example, the recent oil price increases, which will feed into both headline inflation and eventually into the core. So it may be that we haven't yet seen the peak of inflation.”

“But the important sort of question the Fed has is also how much it will take in terms of higher interest rates to bring it down,” he added.

The European Central Bank (ECB) yesterday too downgraded its growth projections and hiked its inflation forecast.

“With 8 percent inflation, the ECB has this very little choice... Much of this inflation is because of energy prices, those are volatile, they could well come down and really core is lower," said Rajan.

Watch the accompanying video for more details.