The Cost of Misrepresenting Inflation
What is the issue?
- Despite the sharp recovery from pandemic, real output in 2021-22 was barely higher than in the pre-pandemic year of 2019-20 in India.
What is causing inflation in India?
- It is a common mistake to observe sharply rising prices of certain goods and conclude therefrom that it is this that is driving inflation.
- For instance; while the price of edible oils and the world price of crude may have risen following the Ukraine war, the impact of this development on overall inflation in India depend upon their share in the consumption basket of households, which is relatively low.
- Moreover, for the commodity groups ‘fuel and light’ and ‘fats and oils’, inflation has actually been lower in the first five months of 2022 than in the last five months of 2021.
- As these two are the commodity groups most severely impacted by the issues in international market, it is evident that inflation in India is not caused by price rise in global market alone.
- Conversely, direct contribution of food and beverages to the current inflation dwarfs that of all other groups, establishing conclusively that the inflation is driven by domestic factors.
Why Monetary Policy cannot impact food-based inflation?
- Nobel Laureate Joseph Stiglitz observed that “raising interest rates is not going to solve the problem of inflation. It is not going to create more food. What you do is that you have supply-side interventions. Killing the economy through raising interest rates is not going to solve the inflation in any time frame.”
- This is because food is a basic commodity and is considered more inelastic in the demand curve.
What can be done to reduce food inflation?
- Increase the production of food products.
- Reduce supply side bottlenecks through infrastructure development and effective procurement programs.
- Increase warehouse capacity and transportation systems.
Source The Hindu
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