Inflation-Which direction world is moving?

Inflation-What direction world is moving?

Inflation is?the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. In economics, inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

Inflation is increasing not only in India but all over the world. The big question is why even big countries are failing to control inflation. We normally tend to equate inflation as a negative trigger for equity markets. The reasons are not far to seek. Higher inflation means higher cost of living and therefore lower purchasing power. When inflation goes up, people earn less in real terms and that result in lower returns net of inflation. Secondly, higher inflation means higher rates of interest and that also impacts the cost of equity.

Fig 1: Impact on Stock market due to inflation.

Retail inflation in India surged to 7.79% on an annual basis in the month of April. The last highest was in May 2014 to that of 8.33%. When we talk about the rate of inflation, it often refers to the rate of inflation based on the consumer price index (CPI). The CPI tracks the change in retail prices of goods and services which households purchase for their daily consumption.

To measure inflation, we estimate how much CPI has increased in terms of percentage change over the same period the previous year. If prices have fallen, it is known as deflation (negative inflation). The Central Bank (RBI) pays very close attention to this figure in its role of maintaining price stability in the economy.

The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels. The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.

How is CPI calculated (CPI formula)?

To calculate CPI, multiply 100 to the fraction of the cost price of the current period and the base period.

CPI formula:?(Price of basket in current period / Price of basket in base period) x 100

The inflation in Vegetables from Feb 2022 to Apr 2022 was 23%. CPI or retail inflation is calculated based on 450 objects out of which 45% is food grade material. The high rate of inflation in March, 2022 is primarily due to?rise in prices of crude petroleum and natural gas, mineral oils, basic metals, etc. owing to disruption in the global supply chain caused by the Russia-Ukraine conflict. On the other hand, the retail inflation rose mainly on account of rising prices of essential food items like 'oils and fats', vegetables and protein-rich items such as 'meat and fish'. As per the CPI data, inflation in 'oils and fats' in March soared to 18.79 per cent as the geopolitical crisis due to the Russia-Ukraine war pushed edible oil prices higher. Ukraine is a major exporter of sunflower oil. In vegetables, inflation quickened to 11.64 per cent in March, while in 'meat and fish' the rate of price rise stood at 9.63 compared to February 2022.

Fig 2: April-2022 Inflation

Major Reasons of Inflation-

COVID-19- The COVID-19 pandemic has posed significant challenges for supply chains globally.?Multiple national lockdowns continue to slow or even temporarily stop the flow of raw materials and finished goods, disrupting manufacturing as a result.

Savings:?In a survey conducted in May 2020, regarding the impact of coronavirus (COVID-19) on consumer spending behaviour in India, 38 percent of the respondents showed concern about the pandemic and preferred to hibernate and spend. About 35 percent of the respondents were hit quite hard by the pandemic and as a result decided to cut down their spending by a large extent.

Russia Ukraine Conflict- Against an already turbulent backdrop of global inflationary pressures amid rising food and energy prices and disrupted supply chains following the coronavirus pandemic,?the war between Russia and Ukraine is exacerbating supply and demand tensions, damaging consumer sentiment and is threatening global economic growth.

There are three main channels through which climate change can affect central banks’ primary mandate of price stability:

·????????First, global warming is associated with a greater incidence of damaging climatic events, notably windstorms, extremes of precipitation and of temperature. These events may impact specific prices, notably food prices.

·????????Second, the transition to a net zero carbon emission world may imply, at least for some time, sharp increases in the price of carbon, in turn affecting consumer prices directly through higher electricity, gas and petrol prices, and indirectly through increased costs of production for firms across a broad range of sectors.??

·????????Third, higher temperatures themselves may dampen economic activity and reduce labour productivity through higher rates of mortality and morbidity and overall lower efficiency. To the extent that this may reduce long-term growth potential and equilibrium interest rates, it may restrict the available space for conventional monetary policy.

The Reserve Bank of India has said that given the excessive volatility in global crude oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions, any projection of growth and inflation is fraught with risk, and is largely contingent upon future oil and commodity price developments.

Reference List

1.Zee News

2.BBC

3.Economic times

4.Other Social media