Inflation refers to overall increase in the prices of goods and services which effects the cost of living. Consequently, in broader terms, a nation can prosper with balanced prices and salaries. Inflation however increases the cost of living in a country which is somehow more than the salaries and wages of emplyees and workers. As per report by the RBI, Why inflation Rates rise in India? the annual retail inflation rate rose 6.30% year-on-year in May, up to 4.29% in April and above analyst’s estimate of 5.30%. Also, the wholesale price inflation rate rose 12.94%, highest in atleast 2 decades.
Why inflation Rates rise in India | Impacts of the inflation
The prime causes of inflation are rise in prices of raw materials, rise in the wages, increase in taxes, increase in supply of money in the market. This rise of money supply means that more money is there in the market to purchase the same amount of goods and services, which will increase the prices automatically.
Causes of inflation:
The main cause also includes the decline in productivity. Every kind of macro activity happening have a great impact on the economy as a nation wide have a great impact on the economy as a whole, being it an introduction GST or the Ukraine-Russia war which is presently becoming the biggest cause of inflation.
Talking about the introduction of GST, various product services which was earlier charged at 12% of tax soon brought into the tax bracket of 18%, naturally increasing the prices of products and services. If the bifurcation of causes of rising rates of inflation is to be done than these will be divided into two:
- Demand pull inflation
- Cost push inflation.
Demand pull inflation means inflation caused due to increase in aggregate demand. The reasons for this include- fiscal stimulus (increase in money supply in economy), increasing the spendings of government in various schemes run by the government like the increased financial assistance under PM-KISAN, increase in wages under MGNREGA and many more. Also, if essential items are exported from country at an accelerated rate, then demand for these goods will result in inflation given their poor availability. The second reason of Why inflation rates rise in india increase in aggregate demand is Monetary stimulus which is result of increase in money supply by the central bank. Also, it includes the availability of surplus money increasing household consumption as people are willing to spend plentiful.
Impact of Russia-Ukraine War
The second cause of inflation and why inflation rates rise in India as mentioned is cost push inflation, which is fundamentally rise in production costs which covers the increase in salaries or wages of employees, rise in prices of raw materials, spike in crude oil prices, reduction in agricultural output because of natural disasters happening, increase in import prices, devaluation of currency and many more.
Not to forget about the Ukraine-Russia war which is causing ripple effect on the prices of crude oil hence is becoming the significant factor of inflation in India. headline inflation has been above 4% mark since 2019-20. It is calculated using consumer price index which has different categories with varying weights. The 3 main categories are:
- Food items- accounting for 46% of the index.
- Fuel and light- weighing 7%.
- CORE and all other items- for remaining 47%.
Passing by the time, the factors driving the inflation are increasing more and more. In 2019-20, overall inflation was 4.8% which was due to 6% spike in food price. In 2020-21, food prices rose by 7.3% which resulted in the increase in core inflation rate by 5.5%. The reason for the same is unforgettable pandemic hitting the economy.
In 2021-22 when global economy started recovering food price inflation moderated 4%, fuel prices gone by 11.3% and core inflation rose to 6%. In current financial year, inflation rate is estimated to be 6% or more.
Impacts of the inflation:
- It reduces the purchasing power of people. The poor are the worst affected in the times of high inflation existing for a very ling time as they have litter buffer to sustain.
- Only the essentials are the matter of concern for people and reducing the overall demand, cutting the typical non-essential demands.
- Borrowers are in better condition as they end up paying a lower ‘real’ interest rate. The savers are the sufferers as if the inflation rate is 7% and are interest on their savings is 7% effectively means no benefit.
- Government being the single largest borrower in the economy is benefitted. The reason behind it is, government meet the debt obligations is fiscal deficit targets (percent of nominal GDP). As the nominal GDP rise due to inflation, the same amount of fiscal deficit (borrowing) become a smaller percentage of GDP.
- For corporates, the large ones enjoy high profits in short terms. The small corporates will face the situation of reduced sales and profitably because of lower demand which is surely the result of higher inflation.
- Most importantly, the impact on the exchange rate, rupee losing its power and if the central bank does not raise the interest rates fast enough, returns will be reduced because of which investors don’t take the active participation because for example, on a certain day, the return on the government bond is 8% but the inflation rate reaches 8.5% leading to negative rate of return.
Everything in a limit is good implying that slight inflation is desirable for the growth of economy but the uncontrolled inflation leads not just decline in growth but also starts harming rather than doing good.