Inflation also impacts the cost of living, the cost of doing business, borrowing money, mortgages, corporate, and government bond yields, and every other facet of the economy.
Inflation causes a rise in the interest rates and as interest rates go up the government will have to incur higher expenditure to pay interest to the public who has invested in government bonds, bank fixed deposits and company fixed deposits.
The supply side inflation is a key ingredient for the rising inflation in India. The agricultural scarcity or the damage in transit creates a scarcity causing high inflationary pressures. Similarly, the high cost of labour eventually increases the production cost and leads to a high price for the commodity. These supply driven factors have basically a fiscal tool for regulation and moderation. Further, the global level impacts of rising prices often impact inflation from the supply side of the economy.
Crude oil prices were the biggest contributor to the rise in wholesale price index inflation in March 2022. The war in Ukraine and the associated prices due to higher prices of crude oil are a significant contributor.
The annual inflation rate in India edged down in June 2022, slightly below market expectations. However, it remained above the RBI’s target range of 2%-6% for the 6th straight month. Prices of food rose 7.56 % , particularly vegetables (17.37%), spices (11.04%) and oil and fats (9.36 %).
Additional upward pressure came from costs of transportation and communication (6.9 %), health (5.47 %), education (4.51 % ) and housing (3.93 % ). On a monthly basis, consumer prices went up 0.52 %, after a 0.94% gain in May. Inflation was set to measure 7.3% and 6.4% in Q3 and Q4 2022, respectively, according to forecasts from July 4-11.
Data sources: Investopedia, Economic times and Livemint.com
Views are personal: The author – Dharmesh Parikh is a Mutual Fund Distributor from Eurasia Capital Services
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