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Current Affairs

US inflation and its impact

Date: 15 November 2021 Tags: World Economy

Issue

Retail inflation in US has spiked to 6.2 per cent in October. In India, retail inflation rose to 4.5 per cent according to India’s National Statistical Office (NSO).

 

Background

The inflation has gained lot of attention, both globally and in India. 

 

Details

  • Inflation is defined at a rate at which prices increase over a given period. Inflation rate is calculated on a year-on-year basis.

  • If the rate of inflation for a particular month is 10 per cent, it implies that the prices in that month were 10 per cent more than the prices in the same month a year earlier.

  • The main problem is that inflation erodes purchasing power of people. The poor sections are most hurt as less money and higher prices affect the livelihood.

 

The concern in US

  • The 6.2 percent increase in inflation will not have much effect in India but it is the largest year-on-year increase in the last three decades in US.

  • The Federal Reserve targets an inflation rate of just 2 per cent. It is a massive concern for its citizens as the trend has been increasingly seen.

 

Cause of inflation in US

  • The reason may be either due to increase in demand or a decrease in supply. The US has registered 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.

 

Global situation

The inflation in US has been the sharpest but other developed economies are also facing similar trend. This includes countries such as China, Japan and Germany.

 

Indian situation

  • Inflation rise in India was observed even before pandemic. The pandemic has worsened the situation as supply chains collapsed.

  • The retail inflation rate in India has been above comfort level of RBI. This has forced RBI to keep rates unchanged even after India entered technical recession.

  • The core inflation is a sign of worry for India. It is expected to worsen after getting impacted due to the global situation.

 

Impact on India

  • As inflation grows in US, the prices of goods imported from US become costlier. The US Fed 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 trend.