Until ten days ago, when the RBI warned of inflation, very few were willing to pay heed. Then inflation crossed 6 per cent. Now the same people who were complaining about the tighter money policy are asking the RBI to tighten monetary policy even further. Who said a central bankers' lot was an easy one?

Not just that. Almost as if it is engaged in a game of "me-first" with the RBI, the finance ministry has steeply reduced import duties on a number of products, placed a ban on futures trading in two varieties of pulses, and could cut petroleum products prices as well. Talk about grandstanding!

To deliver the coup de grace to inflation, the Reserve Bank of India will puff in on January 31 with a rate hike and maybe also raise the CRR. Then everyone will sit back and hope that inflation will go away.

Will it? Probably not because, as I never tire of telling monetarists, the impact of the current levels of global liquidity has not been fully understood.

The combination of global integration, Indian and Chinese growth, underpinned by such huge liquidity is going to have very abnormal consequences for inflation. It will be a much harder nut to crack than it has been in the 1980s and the 1990s.

So if it is too much money chasing too few goods what should one do about it, especially in these globalised times? The Bank of International Settlements called in the troops late last October to chew the cud.

Many explanations emerged. These have now been summarized* by William Melick and Gabriele Galati. Everyone interested in the subject should read it. The issue, as they frame it, is, "There is little doubt that almost every country has experienced a statistical change in the univariate inflation process." That is, it is not just too much, too few goods. There is more to it.

So the papers presented tried to focus on ways to integrate domestic monetary policy with international factors into the structural models.

One factor is that liberalisation of domestic markets and lower tariffs have led to a huge increase in supply. The resultant higher productivity has not -- the CPI(M) may please note and call for a global bandh -- been accompanied by wage increases.

This had also contributed to keeping inflation low in spite of the massive increases in liquidity. But those good times seem to be over now.

There also seems to have been a sharp drop in the number of external shocks such as the oil price increases of the 1970s. And, of course, central banks are probably doing a much better job of conducting monetary policy.

One important factor, referred to by this column last week, was the "consistent finding of considerable heterogeneity in price setting across sectors."

That is, monetary policy needs to stop being a broad-spectrum antibiotic and start keeping in view microeconomic, sector level price responses also.

This is once again the consequence, amongst other things, of the huge liquidity in the system. In India, at least, this means that efforts to curb credit growth will not be very successful in containing inflation because money is available aplenty from non-banking sources.

The authors also say that "changes in the nature of the Phillips curve imply that traditional measures of the real economy, such as the output gap or deviations from the natural rate of unemployment, may become even harder to infer."

Does this mean that central banks should devote more attention to the labour market?

Or have, as the US Fed chief Ben Bernanke once asked, economists simply "failed to allow for the possibility that changes in the policymaking framework may have altered other parts of the economic structure?"

The Evolving Inflation Process: An Overview, BIS Working Paper Number 196.