Understanding The Concept And Phenomenon Of Inflation

Understanding The Concept And Phenomenon Of Inflation

Inflation is one of those economic phenomena that affect every citizen. Almost every day, the majority of the population of India particularly the literate class is aware of this term, yet, perceptions are often at variance with reality. How during periods of falling inflation, prices still go up is a common question or confusion of the majority of the population, which shows that the people have limited knowledge about it. When inflation is falling, it is only the rate of increase in prices that is falling down, which is referred to as disinflation. It doesn’t mean prices are falling, it means prices are increasing but at a lower rate. Inflation has generally a negative impact on the minds of people. For them, inflation is a rise in prices and it seems like even 1% inflation is worst. But in reality, many economists believe that up to 3% inflation which is termed “Creeping Inflation” is good for the growth of a country depending on whether the country is developed, developing or underdeveloped. Since India is a developing country and it requires growth and development simultaneously so it is suggested that 6% may be the ideal level of inflation here.
WHAT LEADS TO INFLATION IN INDIA?
• 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 annual average rate of only 4%. Hence the rate of increase in output is lesser than the quantity of money in the economy which causes inflation.
• Size of the population is another reason for the inflation in India. The estimated population of India in 2022 was 1,417,173,173, a 0.68% increase from 2021, this ultimately leads to an increase in demand that in turn leads to inflation.
• In our economy the larger part of the market is regulated by government action. For consequential commodities, both agricultural as well as industrial, the government keeps on raising prices from time to time in order to cover up losses in the public sector which leads to cost-push inflation.
• International comparison among OECD {Organization for Economic Cooperation and Development} shows that rising inflation is a global phenomenon. International inflation gets imported into a country through major imports like fertilizers, edible oil, steel, cement, chemicals, petroleum and machinery. Currently, India is dependent on imports for 85% of its oil needs and 50% of its natural gas requirements. The war between Russia and Ukraine has caused a disruption in the global chain, thereby pushing up the prices of crude oil. So the increase in the import price of petroleum afflicts the Indian economy and its contribution to domestic price rise is very high.
IMPACT
The person most affected by rising inflation is the final consumer of goods. The prices of goods and services are continuously rising, but the salaries and incomes of consumers do not rise proportionately, which creates a lag, that reduces the purchasing power of money of a consumer. So the goods and services become less affordable to these final consumers. Lower-income groups of the population, that is the poor people, are most affected by it. Around 229 million people are multidimensionally poor in India, with the rising inflation they cannot afford even basic necessities. Households would indeed feel the pinch if RBI opts to raise interest rates in the near future. If the central bank opts to hike interest rates, it will put upward pressure on the monthly expenditure of households as the amount of EMI (equated monthly installments) that people pay for loans will rise.
However, inflation is not always bad news as far as the equity market is concerned. Sometimes it also conveys that growth is picking up which creates its own inflationary linkages. Secondly, there are some sectors in the economy like oil, and gas which are obvious beneficiaries of inflation. Not all sectors of the economy suffer from inflation equally. Commodity producers are clear beneficiaries of rising inflationary trends. Of course, some segments of the economy will suffer and will have second and third-order impacts as far as corporate earnings are concerned. Sectors like utilities and telecom also to a large extent do not get any direct negative impact on their margins or profitability due to inflation.
CURRENT SCENARIO
There are two indices that are used to measure inflation in India – the consumer price index (CPI) and the wholesale price index (WPI). The CPI analyzes the retail inflation of goods and services in the economy across 260 commodities and the WPI analyzes only goods across 697 commodities. The country’s WPI eased to a 21-month low of 5.85% in Nov. 2022, down from 8.39% in October. On the other hand, CPI dropped to an 11-month low of 5.88% from 6.77% during the period. Overall the inflation rate in 2022 was 6.89% and in the year 2021, it was 5.51%. There was an increase in the rate of inflation in the year 2022 primarily due toRussia-Ukraine war which has led to the globalization of inflation. The war and the sanctions imposed on Russia took a toll on economies. Besides the sharp rise in crude oil prices adversely impacted inflation in India. However, major economies of the world like the USA, the UK and other European countries observed hikes in the inflation rates due to the Russia-Ukraine war. CPI inflation reached historically high levels in the US at 8.6% in the UK at 9.1% and in Germany at 7.9% in May 2022. In Japan where CPI inflation often remains negative, it increased to 2.4%.In comparison to these nations, India’s inflation rate was the lowest because of the proactive steps taken by RBI (Reserve Bank of India). The central bank has been ahead of the curve in deciding rates, in inflation projections and even in liquidity adjustment. India is even projected to grow at a faster pace as compared to the developed nation.
MEASURES TAKEN OR NEEDED TO CONTROL INFLATION
The government of India from time to time has taken a series of measures to ease inflation. When the demand is higher than the supply, the government can tackle this with its fiscal policy in two ways. One, by decreasing the overall government expenditure and transfer payments. Two, increasing the tax which leads to decreased individual demand and a drop in the economy’s money supply. Like the government has announced an excise tax cut on petrol and diesel, it has also announced a reduction in the import duty on critical raw materials for production and inputs for the steel and plastic industry. The government of India has capped the sugar export and banned wheat exports altogether. All these steps were taken in order to cool off the prices.
RBI with its monetary policies played a crucial role in inflation. RBI has many monetary tools to control the inflation like Repo Rate, Reverse Repo Rate, Open Market Operations, Bank Rate policy, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR). The RBI has consecutively hiked the Repo Rates in May and June 2022 by 0.90% in these two months. RBI again hiked Repo Rate in December 2022 by 35bps to control inflation.
In order to beat inflation, as individuals we can control inflation by increasing labor supply, capital supply, productivity and personal savings can help to reduce inflationary pressures.
BOTTOM LINE
Knowing the ground reality that there are many misconceptions about inflation, I being a student of economics, have put a small effort into this article to make people aware of the concept of inflation.

Lubna Shabir is a student of Economics (Honours) at Government Degree College Sopore. Feedback at [email protected]

 

Leave a Reply

Your email address will not be published.