Rise in Inflation

In News

• Recently, Inflation faced by Indian consumers shot up to a nearly eight-year high of 7.8% from 6.95%.

About the recent trend in Inflation

• The National Statistical Office said rural inflation accelerated to 8.4% and urban parts of the country experienced 7.1% inflation.
• The Consumer Food Price Index jumped to 8.4% from 7.7%.
  • Food prices rising at a faster clip of 8.5% in rural India.
  • Cereals inflation is high because of higher wheat prices.
• Fuel and lighting have high inflation of 10.8% and there has to be some reduction in taxes and duties from the government to cool off-price pressures.
• Transport and Communication inflation raced to nearly 11% from just 8%
• Food and beverages inflation sped up from 7.47% to 8.1% led primarily by a sharp rise in vegetable inflation from 11.6% to 15.4%, even as the price rise in oil and fats eased marginally to 17.3% from 18.8%.
• Meat and fish inflation also cooled a bit from 9.63% to about 7%.
• Among the States: West Bengal and Madhya Pradesh recorded a much higher inflation rate than the national average, at 9.1%, closely followed by Telangana and Haryana which reported inflation of around 9%.
  • By contrast, Kerala (5.08%) and Tamil Nadu (5.37%) clocked the lowest inflation rates.

Main causes of inflation

• Monetary Policy: It determines the supply of currency in the market. Excess supply of money leads to inflation. Hence decreasing the value of the currency.
• Fiscal Policy: It monitors the borrowing and spending of the economy. Higher borrowings (debt) result in increased taxes and additional currency printing to repay the debt.
• Demand-pull Inflation: Increases in prices due to the gap between the demand (higher) and supply (lower).
• Cost-push Inflation: Higher prices of goods and services due to increased cost of production.
• Exchange Rates: Exposure to foreign markets is based on the dollar value. Fluctuations in the exchange rate have an impact on the rate of inflation.
• Demand-supply gap: High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.

How do we prevent inflation?

• Change the monetary policy: The primary strategy is to change the monetary policy by adjusting the interest rates. Higher interest rates decrease the demand in the economy. This results in lower economic growth and therefore, lowers inflation.
• Controlling the money supply can also help in preventing inflation.
• Higher Income Tax rates can reduce spending, hence resulting in lesser demand and inflationary pressures.
• Introducing policies to increase the efficiency and competitiveness of the economy helps in reducing the long term costs.
• Invest in long-term investments: When it comes to long-term investments, spending money now for investments can allow you to benefit from inflation in the future.

Effects of a rise in the inflation rate

• Inflation could lead to economic growth as it can be a sign of rising demand.
• Inflation could further lead to an increase in costs due to workers’ demand to increase wages to meet inflation. This might increase unemployment as companies will have to lay off workers to keep up with the costs.
• Domestic products might become less competitive if inflation within the country is higher. It can weaken the currency of the country.  

Way forward/ Suggestions

• Strength: India faces these challenges from a position of strength built on broadened vaccine coverage, financial sector resilience, robust export and remittances and fiscal reprioritization to spur capital spending on infrastructure.
• Spurring private investment: remains a key thrust area for sustaining growth on a durable basis.
• The third wave seems to be behind: with the removal of all curbs, alongside a broadening of vaccination, economic activity is returning to speed.
• Most sectors are reaching or have exceeded pre-pandemic levels: Bank credit has gathered pace and the job market is gathering steam.
• Growing GST collections: Is an indicator of growth in the segment of the economy that collects the tax.

Source: TH