What are the factors that influence the inflation trends in the country? Highlighting the impacts, discuss the institutional measures in place to check inflation.

Factors that influence inflation trends

1. Supply Side factors

a) Global headwinds reducing supply of essential commodity. eg: Russia → Wheat, Ukraine war inflation. -> Weather events

b) Weaponisation of supply chain due to trade war. eg: China → Active Pharma ingredient.

c) Reduced Economic activity due to business disruption. eg) COVID lockdown

d) Higher logistic cost increases price without value addition. eg) India → 14%.

e) Monetary tightening → reduced credit → less production/expansion ← Inflation

1. Demand Side factors

a) Pent-up demand due to unlockdown, festival

b) increased discretionary spending due to increase in income without goods eg) Cash transfer

c) Weather Events leading to Anticipatory buying & Stock holding - eg) Cotton stockholding

Impacts of High Inflation

a) Positive impacts -> expansion of business. -> increased spending -> increases employment opportunity (Phillips curve) -> makes export competetive due to decreasing exchange rate

Negative Impacts

1. Erodes the savings of old age people

2. Volatility of currency, stock market discourages FDI. eg > Pakistan.

3. disproportionately affects the creditor or loan giver → banks → less credit creation suffer

4. Psychological impact on minds of consumer decrease demand.

5. Reduced propensity to save → Higher fiscal deficit

Institutional Measures

1. RBI monetary policy tools → Repo Rates, MSF, moral suasion.

2. Fiscal policy tools of reducing demand via Higher taxation

3. Promoting supply chain diversification

4. Increased domestic production. eg > Aatma Nirbhar bharat.