News Highlights
India’s retail inflation slipped below the 7% mark for the first time since April, easing to 6.71% in July.
Key Takeaways
- The pace of price rises has been above the upper tolerance limit of 6% for the seventh month in a row.
- Rural inflation eased from 7.09% in June to 6.8% in July, while urban consumers faced 6.49% inflation, down from 6.86% in June.
What is inflation?
- Inflation is the general increase in the prices of goods and services in an economy.
Causes of inflation
- Demand-Pull Inflation:
- Demand-pull inflation arises when aggregate demand in the economy exceeds aggregate supply.
- Cost-push inflation:
- When there is a decrease in the aggregate supply of goods and services, it increases the cost of production.
Types of inflation
- Creeping Inflation:
- When the rise in prices is very slow (less than 3% per annum), like that of a snail or creeper, it is called “creeping inflation.
- Walking inflation:
- When prices rise moderately and the annual inflation rate is a single digit (3% – 10%), it is called “walking or trotting inflation.
- Running Inflation:
- When prices rise rapidly, like the running of a horse at a rate of speed of 10% – 20% per annum, it is called “running inflation.
- Galloping Inflation:
- Inflation in the double or triple-digit range of 20, 100 or 200 per cent a year is called galloping inflation.
Factors causing inflation
- Demand Side inflation:
- It is caused by high demand and low production or supply of multiple commodities creating a demand-supply gap, which leads to a hike in prices due to increased consumption.
- For example, when the government lowers taxes, it also drives demand.
- Cost Pull inflation:
- It is caused by a shortage of factors of production like labour, land, capital etc. and also due to artificial scarcity created due to hoarding.
- For example, if low-paid workers in a factory form a union and demand higher wages.
Indicators used to measure inflation in India
- The Wholesale Price Index (WPI):
- It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
- Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
- The Consumer Price Index (CPI):
- It is the measure of changes in the price level of a basket of consumer goods and services bought by households.
- It is released by the National Statistical Office (NSO).
Positive impacts of inflation
- Increased Profits for Producers:
- In most cases, inflation benefits the producers of goods. They make more money because they can sell their products at higher prices.
- Shareholders’ income increases:
- If a company’s profits increase due to inflation, it can pay out dividends to its shareholders.
- As a result, shareholders’ dividend income may increase during inflationary periods.
- Borrowers’ Advantages:
- Inflation reduces the purchasing power of money. As a result, if the borrower pays an interest rate lower than the inflation rate, he benefits from the process.
- This is due to the fact that the real value of the money returned by the borrower is less than the value of the money borrowed.
- Government’s tax revenue improves:
- As the cost of goods and services rises, people must pay more in indirect taxes.
- Tax revenue increases for the government, but the real value does not keep pace with the current inflation rate due to a lag in tax collection.
Negative impacts of inflation
- Real-Income falls for groups with fixed income:
- This means that people on fixed incomes, such as salaried workers, pensioners, and the like, will see a drop in real income.
- To put it another way, their purchasing power will be reduced.
- Income distribution inequality is rising:
- Profits for business owners and entrepreneurs rise due to inflation.
- People in fixed-income groups, however, see a decrease in their real income.
- As a result, income inequality is more pronounced during this time period.
- Rupee may depreciate
- Due to less purchasing power parity, the demand for the dollar increases, depreciating the Indian rupee.
- This benefits the exporters and will burden the importers.
- Lenders Will Sustain Losses:
- As mentioned before, borrowers benefit from inflation when it positively impacts them.
- As a result, lenders risk losing money during such times.
- This is because they receive a sum with less purchasing power than the amount loaned.
Inflation targeting
- It is a central bank policy that focuses on altering monetary policy to attain a set annual inflation rate.
- In India, the Monetary Policy Framework Agreement agreed between the RBI and the government in 2015 established inflation targeting.
- The RBI is mandated to maintain a rate of inflation of 4% with a 2-percentage-point deviation, i.e., inflation must be kept between 2% and 6%.
- If consumer inflation is more than 6% or less than 2% for three consecutive quarters beginning in the 2015/16 fiscal year, the central bank will be considered to have missed its objective.
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Content Source: The Hindu