The Heating Effect of Inflation

Inflation is a general price level of an economy over a period of time. Due to the rise in general price, each unit of currency buys lesser goods and services. So, inflation indicates the loss of purchasing power of the consumer. Due to an increase in price, you will buy lesser goods and services at the same unit of currency. This leads to loss of purchasing power of the currency of a country.

Sir Frederick Leith-Ross stated that “Inflation is like an immortal act; every government implements and denounces it.”

With a widespread surge of Covid-19, power and energy cost, the global inflation trend is extending. People aren’t able to celebrate festivals because of the escalation. As India’s retail price inflation eased to 4.91% in November 2021. Inflation which is measured by Consumer Price Index (CPI), Price growth picked up in November rising by 5.10%, higher than 4.48% in October. High inflation in fuel, liquified crude oil, medicine and edible oils are significantly impacting consumer price.

What fuels India’s high inflation?

Increase in money supply

The money supply refers to the amount of cash circulating or currency in an economy. measures of money supply take into consideration non-cash items like credit and loans as well.

Over the last few years, the rate of increase in money supply has varied between 15% and 18%, whereas the national output has increased at an average rate of only 4%. The rate of increase in output is not sufficient to absorb the rising quantity of money.

Deficit financing

In India, it is outlined as “borrowings from the Reserve Bank of India against the issue of Treasury Bills and slowing down of assembled cash balances”. It transfers its securities to the Bank, when the government borrows from the Reserve Bank of India. Throughout the sixth and seventh Plans, huge doses of deficit financing had been resorted. It was ₹15,684 crores within the sixth Plan and ₹36,000 crores within the seventh Plan.

Rising import prices

Foreign inflation gets imported into the country through major imports like edible oil, steel, cement, chemicals, fertilizers, and machinery. Increase in the import price of crude oil has been most spectacular and its contribution to domestic price rise is extremely high.

Rise in Wholesale price index (WPI)/Food is on Fire

The wholesale price-based inflation rose to 14.23% in November, helped by moderating food prices even as crude oil witnessed a spike. It remained double-digit upto sixth month.

With inflationary pressures and a stagnant output, is India looking at stagflation? Is it unavoidable?

What is Stagflation?

In simple terms stagflation is a situation in which the economic growth rate slows, the inflation rate is high, and unemployment remains steadily high.

As the second wave of corona has been seen all over India, mostly it affected the rural area and left India high and dry. The months of April and May saw the blow of lockdown in India and economic activity at halt. India might be headed towards ‘Stagflation’, due to the increasing inflationary pressures and a stagnant output. The prices of petrol and diesel breaches record-high and it’s adding fuel to the fire.

As an Indian economist tweeted that “India’s inflation shows sharp rise. With growth at record low, core inflation 6.5% (highest in 83 months), Retail inflation 6.3%, and wholesale inflation 12.9% and its lead to stagflation. We mustn’t live in denial. All government expenditure should be directed to help small businesses & the poor.

As RBI has little control and its top priority is repairing the supply chain, the government of India needs to step in a big way, the reports say.

It’s nigh on impossible for the solutions to stagflation. Monetary policy will generally try to increase economic growth (cut interest rates) or cut back inflation (higher interest rates). The rising threats of stagflation puts RBI in a difficult problem. In an ideal situation monetary policy would stimulate the economy by stoking demand. But if the economic growth goes hand in hand with the price rise, it cannot be addressed by cutting interest rates and quantitative easing and money printing. 

Contradicting monetary policy

One of the common techniques to dominant inflation is through contradiction monetary policy. The goal of a contractionary policy is to decrease the bond price within an economy to reduce money supply and increase the interest rates. it leads to less available credit, which can reduce spending. This helps to reduce spending, which means less money to go around. Those who have money will save it, rather than spending it. Reducing spending is important during inflation because it helps halt the rate of inflation and economic growth of the country.

 This reflected the K-shaped recovery. The lower leg of the K signifies lower income households and rural areas and the upper leg of the K signifies goods and services consumed by the higher income and also hugely benefited to the population from the rise in stock market wealth.

 What measures are taken by the RBI to stable the inflation rate?

As Governor Das declared “RBI focused on bringing back inflation to 4% without Disruption.” Retail inflation which was higher than 6% during May and June, has started moving down and stood at 4% in the month of September.

Expectation of softening of inflation in July and August this year was weakened by the numerous lowering in food value momentum, particularly in August. Going forward, the governor also mentioned if there are not any spells of unseasonal rains, food inflation is probably going to register vital moderation within the immediate term, assisted by recording, quite adequate food stocks, kharif production, supply-side measures and favorable base effects. Violating crude oil cost, is pushing cost to new highs and raising risk of spill over of transportation costs into retail cost of production.

In my view, the largest risks to India’s political economy prospects are global and they could map suddenly,” he added. RBI Executive Director Saggar stated that “To calibrate our policies, we should consider different scenarios.”

As we have discussed about the “heat of inflation”, it’s been faced by most of the countries all over the world. As a country like Sri Lanka is on the verge of bankruptcy with dues and as inflation soars high. This blog is to emphasise the importance of “vocal for local” as all government expenditure should be directed to help small business & the poor. It’s our responsibility to support local brands and take them to a global stage.

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