Rise in Inflation


Prelims: Concept of Inflation, Measures of Inflation

Mains: Factors and Impact of Inflation

Inflation: About

According to IMF

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

It can also be more narrowly calculated—for certain goods, such as food, or for services, such as a haircut, for example.

Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.

Inflation: Factors Responsible and types

  • Monetary Policy
  • Fiscal Policy
  • Demand supply gap
  • Demand pull Inflation
  • Cost-Push Inflation
  • Exchange rate
Current rise in Inflation in India: Reasons

Demand-supply gap

Russia-Ukraine war: Domestic pricing have been influenced by global supply interruptions caused by Russia's geopolitical confrontation with Ukraine. For example, Indonesia's recent prohibition on palm oil exports is projected to drive up the price of already high-priced edible oils. As a result of the battle, the price of crude oil, natural gas, mineral oils, and basic metals has risen dramatically.

Wheat exports: The rising domestic costs are the unintended consequence of India being a wheat exporter to meet demand from nations such as Turkey and Egypt.

Heatwaves: The ongoing heatwaves in India have hampered wheat production, resulting in a price increase.

Demand-pull Inflation

Food inflation: Food inflation is strong at 8.4%, since even cereal inflation is high due to rising wheat costs. Some vegetables, such as tomatoes, potatoes, ginger, and iodized salt, as well as fruits like apples and papayas, have seen an increase in price.

Cost-push Inflation

Crude oil: Food, fuel and light, as well as transportation and communication prices, are all affected by the worldwide crude price increase.

Ripple effect: High commodity prices are being passed on to consumers, combined with the ripple effect of higher transportation and logistical expenses.

Exchange Rates

Rupee depreciation: In a country with an import-oriented economy, a decreasing rupee has increased the cost of imports, putting further strain on people's pockets.

Impacts of Inflation

Purchasing power of people is reduced: Inflation restricts people’s ability to purchase things. When coupled with Covid-19 led reduced incomes and job losses, households would struggle even more. Poor will be worst affected owing to little buffer to sustain through long periods of high inflation.

Reduction in overall demand: Consumers seek fewer goods and services as a result of their diminished purchasing power. Non-essential needs, such as vacations, are typically slashed while households prioritise the necessities.

Negative impact on savings and benefit to borrowers: Inflation eats away at the real interest gained by storing money in the bank or other forms of savings. For example, a nominal interest rate of 6% on a savings deposit could be wiped out by a 6% inflation rate. Borrowers, on the other hand, benefit from rising inflation because they pay a reduced "actual" interest rate.

Aids the government in meeting its debt obligations:  Inflation also assists the government to stay within its fiscal deficit targets. The fiscal deficit ceiling is calculated as a percentage of nominal GDP. Government borrowing becomes a smaller percentage of GDP as nominal GDP rises due to inflation.

Corporate profitability yielded mixed results: large corporations profit handsomely in the near term by passing on price increases to consumers. Smaller businesses, on the other hand, may have lower sales and profits as a result of lower demand caused by persistently rising inflation.

Higher inflation expectations: People's psyche is altered by persistently high inflation. People anticipate rising prices in the future and want higher wages. However, as businesses attempt to price goods and services even higher, this creates its own spiral of inflation.

Affecting capital-intensive industries: As the cost of capital rises, inflation rises even more, resulting in increased commodity prices and higher logistics and transportation expenses. Furthermore, this condition will induce financial market instability.

Measures required to control recent inflation

Monetary policy tightening: The RBI's recent decision to hike the repo rate by 40 basis points and the cash reserve ratio (CRR) by 50 basis points is intended to curb the economy's demand-pull inflation. The central bank raised the repo rate for the first time since August 2018.

Reduced indirect taxes: Due to higher GST collections and a 49 percent increase in direct tax receipts in 2021-22, the government may be able to lower central excise duty rates on petroleum goods in order to keep inflation under control. It can also be used to simplify duties on raw supplies.

Burden Sharing: The government can also shoulder some of the burden of commodity price increases.

Higher food and fertiliser subsidies, lower excise duties on gasoline and diesel, lower customs duties on import-dependent products like edible oil, and interfering in agriculture markets through open market sales and stocking regulations, among other things, could all help.

MSP (Minimum Support Price) Increase: The government may consider increasing the MSP to account for farmers' production costs (fertiliser, power, raw materials, transportation, logistics, and so on)...

Examine the rupee's volatility: The RBI has also been intervening in the forex market to check rupee volatility by selling more dollars in the market.

Long-term investments: When it comes to long-term investments, investing today can help you benefit from inflation later.

Posted by on 24th May 2022