Daily Current Affairs : 4-January-2024
In recent years, the Reserve Bank of India’s analysis highlights a distinctive change in inflation dynamics, where supply-side factors contribute significantly. From January 2019 to May 2023, 55% of Consumer Price Index (CPI) headline inflation is attributed to supply, while demand contributes 31%.
Impact of Covid-19 Waves: Unveiling Supply Disruptions
Supply Disruptions During Lockdowns
- Primary contributors to inflation were supply disruptions during Covid-19 waves.
- Lockdowns led to decreased production and demand, causing a sharp economic decline.
- Weakened demand resulted in reduced commodity prices.
Challenges in Reopening
- The economy’s reopening, coupled with vaccine distribution and pent-up demand, outpaced supply recovery.
- Imbalance exerted upward pressure on commodity prices.
- The Russia-Ukraine conflict in 2022 intensified supply chain challenges, compounding price pressures.
Methodology for Assessing Inflation Causes: A Monthly Perspective
Monthly Shifts in Prices and Quantities
- Inflation nature is defined by unforeseen shifts in prices and quantities within a month.
- Demand-driven inflation occurs when prices and quantities move together; supply-driven inflation sees opposite movements.
Supply-Driven Inflation Indicators
- Unexpected changes in opposite directions indicate supply-driven inflation.
- Decreased supply with increased prices, and vice versa, characterizes supply-driven inflation.
Combining Demand and Supply Factors
- Overall headline inflation assessment combines demand and supply factors at the sub-group level using CPI weights.
Headline Inflation Measurement
- Comprehensive measure using the Consumer Price Index (CPI).
- Determines inflation by assessing the cost of purchasing a fixed basket of goods.
Understanding Inflation: Definition and Impact
Definition of Inflation
- Rate of increase in prices over a specified period, covering overall or specific goods and services.
- Signifies the rising cost of living, indicating increased expenses over a defined period.
Impact of Inflation in India
- Particularly significant given economic disparities and a large population.
Causes of Inflation
- Demand-Pull Inflation: Arises when demand exceeds supply, leading to a general price increase.
- Cost-Push Inflation: Driven by increased production costs.
- Built-In or Wage-Price Inflation: Feedback loop between wages and prices, influenced by labor demands and collective bargaining.
Important Points:
Causes of Inflation in Recent Years in India
- Supply-side factors play a significant role, contributing to 55% of CPI headline inflation.
- Demand factors contribute 31%, indicating a noteworthy shift in inflation dynamics.
Impact of Covid-19 Waves: Unveiling Supply Disruptions
- Primary contributors to inflation are supply disruptions during Covid-19 waves.
- Lockdowns cause decreased production and demand, leading to a sharp economic decline.
- Weakened demand results in reduced commodity prices.
- Reopening challenges, coupled with vaccine distribution and pent-up demand, outpace supply recovery.
- Imbalance exerts upward pressure on commodity prices.
- The Russia-Ukraine conflict in 2022 intensifies supply chain challenges, compounding price pressures.
Methodology for Assessing Inflation Causes: A Monthly Perspective
- Inflation nature is determined by unforeseen shifts in prices and quantities within a month.
- Demand-driven inflation occurs when prices and quantities move together; supply-driven inflation sees opposite movements.
- Unexpected changes in opposite directions indicate supply-driven inflation.
- Decreased supply with increased prices, and vice versa, characterizes supply-driven inflation.
- Overall headline inflation assessment combines demand and supply factors at the sub-group level using CPI weights.
- Headline inflation is a comprehensive measure using the Consumer Price Index (CPI).
Understanding Inflation: Definition and Impact
Definition of Inflation
- Inflation is the rate of increase in prices over a specified period, covering overall or specific goods and services.
- It signifies the rising cost of living, indicating increased expenses over a defined period.
Impact of Inflation in India
- Particularly significant given economic disparities and a large population.
Causes of Inflation
- Demand-Pull Inflation: Arises when demand exceeds supply, leading to a general price increase.
- Cost-Push Inflation: Driven by increased production costs.
- Built-In or Wage-Price Inflation: Feedback loop between wages and prices, influenced by labor demands and collective bargaining.
Why In News
The Reserve Bank of India’s recent observations reveal a noteworthy shift in the dynamics of inflation in India, with supply and demand factors playing crucial roles. Over the period from January 2019 to May 2023, approximately 55% of the Consumer Price Index (CPI) headline inflation is attributed to supply-side factors, while demand drivers contributed 31%. This shift underscores the need for policymakers to address supply chain disruptions and structural issues to effectively manage inflationary pressures.
MCQs about Decoding Inflation Trends in India
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What factor contributes significantly to Consumer Price Index (CPI) headline inflation in India, according to recent observations?
A. Demand-side factors
B. Supply-side factors
C. External market conditions
D. Government policies
-
During the Covid-19 waves, what were the primary contributors to inflation in India?
A. Increased consumer demand
B. Supply disruptions
C. Stable production and distribution
D. Government interventions
-
How is supply-driven inflation identified in terms of price and quantity movements?
A. Prices and quantities move in the same direction
B. Prices and quantities move in opposite directions
C. Prices increase, quantities decrease
D. Prices decrease, quantities increase
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What is the definition of inflation, as per the International Monetary Fund?
A. Decrease in prices over a specified period
B. Stability in overall price levels
C. Rate of increase in prices over a specified period
D. Fluctuations in commodity prices
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