findings in the RBI bulletin on inflation-What causes inflation in India: Demand or supply issues?

Source: The post findings in the RBI bulletin on inflation has been created on the article “What causes inflation in India: Demand or supply issues?” published in “The Hindu” on 21st December 2023.

UPSC Syllabus Topic: GS paper 3- Indian economy- inflation

News: The article discusses the December bulletin from the Reserve Bank of India, focusing on how India’s inflation is affected by supply and demand. It explains that during COVID-19, supply issues caused inflation, but after the Russia-Ukraine conflict, demand factors became more significant,

What is inflation?

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What are different types of inflation?

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What are the major findings in the RBI December bulletin on inflation?

Data Analysis: Using the Centre for Monitoring Indian Economy’s data, the bulletin categorizes inflation based on price and quantity shifts. If both rise, it’s demand-driven; if they move oppositely, it’s supply-driven.

Cause of supply driven inflation: a) COVID-19 Restrictions- Lockdowns caused production declines, leading to supply shortages, b) Excess Rainfall (2019-2020)- Resulted in supply disruptions, especially for agricultural products, c) Global Events: The onset of the Russia-Ukraine conflict in 2022 exacerbated supply chain issues, impacting global commodity prices.

Cause of demand driven inflation: a) Post-Lockdown Recovery– As COVID-19 restrictions lifted, there was a release of pent-up demand, outpacing supply recovery. b) Vaccine Distribution-Accelerated reopening of the economy, boosting consumer demand rapidly, c) Russia-Ukraine Conflict– Post-conflict, demand-side factors became more prominent, impacting prices.

Overall Inflation Trends: From January 2019 to May 2023, supply factors contributed to about 55% of CPI headline inflation. In contrast, demand factors dropped to 27.1% in 2020 from 41.5% in 2019 but rose again post-COVID-19 and during the Russia-Ukraine conflict.

Specific Categories: (from January 2019 to May 2023)

Supply Constraints item: Vegetables, oils, fats, milk, eggs, pulses, sugar.

Demand Influences item: Non-alcoholic beverages, personal care, health related goods.

Question for practice:

Discuss the major findings in the RBI December bulletin on inflation and how supply and demand factors have affected India’s inflation trends from January 2019 to May 2023.