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US Inflation and Impact on India:

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Why in the news?

Recently, in the released news At 6.2%, retail inflation in the US has made the highest year-on-year jump in 3 decades.

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 staples, etc. 
• Inflation measures the average price change in a basket of commodities and services over time. 
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage
• The opposite and rare fall in the price index of this basket of items is called 'deflation'.

What are the effects and main causes of Inflation?

• The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth.
•  A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.

Causes of inflation:

• High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
• Excess circulation of money leads to inflation as money loses its purchasing power.
• With people having more money, they also tend to spend more, which causes increased demand.

Cause of inflation in US 

• The reason may be either due to increase in demand or a decrease in supply. The US has registered a quick recovery after vaccination. There was unexpected recovery in all-round demand from consumers. 
• The government invested billions of dollars to stimulate demand. The demand for the consumables has increased but supply is yet to be fully back on track. This supply chain collapse has been a major reason for inflation.
•  While the US has seen the sharpest increase in prices, inflation has surprised policymakers across most of the major economies, be it Germany, China or Japan.

What will be Impact on India?

•   As inflation grows in the US, the prices of goods imported from the US become costlier. The US Federation will likely tighten monetary policy.
•   Indian firms trying to raise money from outside India will find it costlier to do so.
•   RBI will be forced to increase interest rates to align with international trends.