How to contain inflation?

Inflation is a common phenomenon experienced by every country in the world. This phenomenon is acceptable as long it is there in the limits. When it grows beyond the limits, it has serious implications on many things. Particularly millions of common people in developing countries are effected. Governments round the world should take proper measures to prevent this evil force from rising its ugly head.

Inflation in India is currently hovering around 12.5 %. Many times Government of India in unison with Reserve Bank of India has taken many measure to contain this. Even then, unfortunately it is growing. There are two types of indices in India used to measure inflation. They are Consumer Price Index (CPI) and wholesale Price Index (WPI).

Growth in inflation is attributed to availability of excess credit in the market. Government was under the impression that if the excess credit is removed from the market, Inflation will be contained. Increase of Reverse-Repo rate is one such measure to remove excess credit from the market (For definition of Reverse Repo rate, go to comments). There are many instances where RBI has increased this Reverse-Repo rate during its periodic review. In the name of this, every bank has increased the interest rates on the money lent by them. As a result of this, one thing that has happened for sure is the EMI of the loans (particularly housing loans) has increased by 50 to 70 %. Inflation continued to rise. Does this mean that government does not know the root cause for inflation? or the quantum of increase in Reverse-Repo rate is not sufficient to contain inflation?

Inflation the un-flattener...

Thomas Friedman said that 'The world is Flat' . He explained the ten flatteners in his book. One of the ten flatteners being the Outsourcing and offshoring. The prime motive that aided the growth of outsourcing and offshoring is cost cutting. The outsourcing has caused backlash in USA. Benefits of outsourcing are so strong that media rating agency Nielsen forgo the tax breaks provided by Florida state government.

Inflation - the Un-flattener...
The reason for cost difference is mainly because of the availability of cheap labor in countries like India, Philippines, Mexico, China etc. India is known to outsourcing destination. Inflation has increased the cost of living around the world. This increase in cost has narrowed the cost difference between US and outsourcing destinations.

The other day i read an article on how inflation has changed the business dynamics of furniture business-owner. He used to purchase raw material in one country and have it shipped to a different country, where the product is manufactured and shipped to United States. Of late, because of inflation the difference of the cost for producing it in United States and else where in the world. He now started producing it in United States.

Also, some of the major banks in Europe who outsourced their IT work to India and other countries are now toying with the idea of having work transferred to Europe. Is the world un-flattening?