Brain Booster for UPSC & State PCS Examination (Topic: Impact of high inflation rate of US on India)

Why in news?

In India and globally rising prices have gained a lot of attention.On 10th November 2021, the United States Labour Department reported the retail inflation at 6.2 % in October
Data released by National Statistical Office showed retail inflation in India has rose to 4.5 % for the October month

Inflation:- Rise in Price

Inflation is the rate of increase in prices over a given period of time
Inflation is a broad measure, such as the overall increase in cost of most goods and services of daily or common use, such as food, clothing, housing or living in the country etc.
Inflation is indicative of the drop in the purchasing power of a unit of a country’s currency
A High inflation destroys the purchasing power of the people.

Inflation measurement

In India, inflation is measured by two main indices:-

Wholesale Price Index (WPI):- The difference in the prices of goods and services sold by businesses to smaller businesses for selling further is calculated by the WPI
Consumer Price Index (CPI):- The difference in the prices of commodities and services such as food, medical care, transport etc. is calculated by CPI

Inflation:- causes

High demand and low production create a demand supply gap, which leads to rise in prices.
Money loses its purchasing power due to excess circulation and this leads to inflation
When people have more money, they tend to spend more and this leads to increased demand
Rise in the production cost of goods also causes inflation as the cost of the final product rises.

Why is US inflation an area of interest?

6.2% is the largest year on year increase in the last three decades
The Federal bank targets an inflation rate up to 2%
Retail inflation in US has been rising sharply almost every month since May 2020
It’s a surprise for most economist and policymakers, all of whom were more focused on staving off a prolonged recession.

Impact on India

Higher imported inflation
Due to high inflation, global economies will abandon loose monetary policy
Two big effects on India

The cost of raising money outside will be higher

RBI will be pushed to raise the interest rates leading to the rise in inflation and production cost going upwards

Reason of high inflation in US

Due to rapid roll out of Covid-19 vaccination drive in US, economy posted a sharp recovery
Further the US government pumped billions of dollars to provide relief to consumers and those who lost their jobs
Due to these, demand have recovered but supply hasn’t
Even during normal times, supply chains would need some time to start functioning normally and cater the demand
The mismatch between pace of economic recovery and supply chain recovery have led to the demand and supply gap

Condition of other economies

Most of major economies of the world are facing the sharp rise in inflation.

Condition in India

In India, high inflation predates the pandemic
Since late 2019, inflation has been above Reserve Bank of India’s comfort zone of 2% to 6%
Pandemic has put brakes on supply side although the demand size is yet below the pre-Covid levels.