The recent case of inflation has not only adversely affected India, but has also worsened conditions in the rest of the world
Current inflation is a mix of demand-pull, cost-push, and intrinsic inflation.AFP
Most people have been talking about inflation for the past two or three months. The government’s cost-push inflation (CPI) data for April 2022 also showed that inflation had been running at 7.9%, causing public unease. The public is more concerned due to the exponential rise in the prices of vegetables, fruits, grains, cooking oil and gasoline. Let’s take a look at this phenomenon.
There are three main types of inflation:
demand-pull inflation It is due to strong demand and short supply. This type of inflation is caused by increased consumer confidence, economic growth, the flow or speed of money, easy access to credit in the banking sector, massive government spending and tax cuts, and high consumer expectations, which all create market demand. In short, there is an oversupply of money in the market, leading to market demand, and insufficient supply, leading to market inflation.
cost-push inflation It refers to the situation where input costs such as raw materials and other inputs such as wages increase the cost of production and the final sales price becomes more expensive. This type of inflation is caused by a rising exchange rate, which makes imports more expensive. The main cause of cost-push inflation is high public debt, which leads to currency printing and devaluation, high input costs, increased taxation, and monopoly or duopoly in a few sectors.
built-in inflation It is a situation where inflation increases gradually over time. As every year, rising wages raise the cost of products, while workers, on the other hand, create demand due to rising wages. This type of inflation is considered critical to economic growth.
The recent case of inflation has not only adversely affected India, but has also worsened conditions in the rest of the world. We are witnessing the rout of Sri Lanka due to hyperinflation. Some – call them pro-left economists or anti-establishment, whatever you want to call them – are spreading fear through their statements, articles or tweets that India too has entered an era of hyperinflation. These people only look at one side of the coin. A chart containing the average inflation rate for the past eight years and the average inflation rate for the past two months for major economies is below. The chart has been compiled from World Bank/IMF data and has taken into account expected rates when data for this month is not available.
As you can see from the chart above, inflation has become the prevailing dogma over the past two months. Countries such as the EU, UK, US, France and others that had low inflation over the past decade are now experiencing hyperinflation. If we compare inflation figures with other countries, India has a high bid. For the calculation of inflation, basically three main components are considered, namely primary goods, including food and groceries, electricity and fuel, and manufactured goods, including base metals, chemicals and chemical products, machinery, textiles, etc. are part of this group.
Current inflation is a mix of demand-pull, cost-push, and intrinsic inflation. The Indian government’s COVID-19 stimulus package has led to a record high in India’s currency in circulation, which now exceeds Rs 310 crore. Likewise, India is primarily an importer, and inflation in other major suppliers due to uncertainty over the Russian-Ukrainian conflict has negatively impacted the cost of inputs such as fuel, metals, chemicals, and led to higher inflation. Rupee vs USD Value also contributes to cost-push inflation. As India is still developing, it spends a lot on subsidies, the poor and the poor, their usual built-in inflation also adds to the inflation story.
The Reserve Bank of India has recently raised its benchmark rate and CRR, sucking around Rs 100 crore from the market, hoping that more decisions to raise the benchmark rate by 1% and increase the CRR and SLR are coming on the first of June Monetary Policy Committee (MPC) meeting this week.
In addition to monetary policy that targets demand-pull inflation, cost-push inflation can be tackled through the combined efforts of the public and the government. The government is buying crude from Russia amid the rubble to stem a rise in global fuel prices, at the expense of diplomatic ties with the developed world. The government should also do more to transact with other countries in currencies other than the US dollar as our rupee has become stronger compared to other major currencies other than the US dollar. This fact can be confirmed from the comparative list of exchange rates of various currencies:
The public should also be inclined to buy homegrown products so that their current account balances stay within a tolerable limit and our currency becomes stronger. They should also avoid the need for subsidies or free items in order to spend money on capital goods to create jobs. This inflation will persist in the short term as long as the Russian-Ukrainian conflict continues and the supply situation remains normal.
Mukesh Kabra is a Chartered Accountant practicing in Surat for 25 years. Yuvraj Pokharna is an independent journalist and columnist. Opinions expressed are personal.