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Source: This post on inflation has been created based on the article “No policy for troubled times” published in Business Standard on 28th October 2023.
UPSC Syllabus Topic: GS Paper 3 Indian Economy and issues relating to planning.
News: This article discusses the various reasons which have led to the current inflation scenario in the world.
Read a detailed article on Inflation Management in India here.
What is inflation?
Inflation refers to the rise in the prices of most goods and services of daily or common use such as food, clothing, housing, recreation, transport, consumer goods.
It measures the average price change in a basket of commodities and services over a period of time.
What is the current inflation scenario?
The target for inflation in most advanced economies is 2%. However, inflation in the USA is at 3.7%, in the Euro area at 5.6%, and in Britain at 6.8%.
In India, where inflation is typically much higher than in these advanced economies, it is hovering at 5%. India is not heavily indebted and showing good economic growth. This should give the RBI room to raise interest rates and aim for the 4% target.
What are the current global challenges with respect to inflation?
1) Global Economic Situation: The world is witnessing a global economic slowdown.
2) Geopolitical conflicts: It has led to inflation in the oil market, and also in various food and other commodity markets.
3) Climate-change imposes additional costs.
4) Ineffectiveness of monetary policy: Due to the above factors, prices will rise even if demand is weak. Monetary policy in this situation will not be as effective.
5) Twin-Balance Sheet problem: Banks and company balance sheets are getting stressed by debt becoming more costly.
6) Lower Investments: Investment will get hit because it would have to deliver higher returns to match the higher cost of capital.
Question for practice:
Inflation management has become a growing concern due to emerging challenges in the global economy. Explain.
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