INFLATION TOLERANCE RANGE
1. Context
In September, consumer inflation in India eased to 5%, offering some respite after a spike that began in July, reaching a 15-month high of 7.44%. This 5% inflation figure is significant for two reasons: it aligns with the Reserve Bank of India's (RBI) tolerance range of 2% to 6%, and it matches the RBI's upgraded estimate of an average 6.4% inflation between July and September.
2. What is Inflation?
- It is the rise in prices of goods and services within a particular economy wherein consumers' purchasing power decreases, and the value of the cash holdings erodes.
- In India, the Ministry of Statistics and Programme Implementation (MoSPI) measures inflation.
- Some causes that lead to inflation are demand increases, reduction in supply, demand-supply gap, excess circulation of money, increase in input costs, devaluation of the currency, and rise in wages, among others.
3. What is the Inflation Rate?
- It is the rate at which prices increase over a given period. In India, the inflation rate is calculated on a year-on-year basis.
- A high inflation rate erodes the purchasing power of people. Since the poor have less money to withstand fast-rising prices, high inflation hurts them the hardest.
- In other words, if the inflation rate for a particular month is 10 per cent, it means that the prices in that month were 10 per cent more than the prices in the same month a year earlier.
- If the inflation rate were to go up to 15 per cent in the same month of the coming year, it implies that something that was priced at Rs 100 in the same month last year, and at Rs 110 this year, will be priced at Rs 126.5 next year.
4. What Causes Inflation
5. Types of Inflation
5.1.Cost-push inflation
- Cost-push inflation (also known as wage-push inflation) occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials.
- Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy.
- Since the demand for goods hasn’t changed, the price increases from production are passed onto consumers creating cost-push inflation.
5.2.Demand-pull inflation
- The term demand-pull inflation usually describes a widespread phenomenon. That is when consumer demand outpaces the available supply of many types of consumer goods.
- And In demand-pull inflation sets in, forcing an overall increase in the cost of living.
- Demand-pull inflation is a tenet of Keynesian economics that describes the effects of an imbalance in aggregate supply and demand.
- When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. This is the most common cause of inflation.
6. Long-Term Inflation Target
- While the current inflation level is within the tolerance range, the RBI's long-term inflation target remains at 4%.
- Achieving and maintaining this target has proven challenging. Projections suggest that this quarter may see an average inflation rate of 5.6%, followed by 5.2% between January and June 2024.
- The RBI's goal of reaching a 4% inflation rate seems distant, given the uncertainties in the economic landscape.
- Expectations of an average inflation rate of 5.4% in 2023-24 are also questioned by the International Monetary Fund and World Bank, who raised their estimates to 5.5% and 5.9%, respectively.
- September's 5% inflation rate was partially influenced by base effects from 2022 when inflation was at 7.4%.
- Additionally, volatile prices of items like tomatoes and vegetables dipped, partly due to the Centre's price cuts on LPG.
- However, it's unlikely that this level of inflation will be sustained or decrease further.
7. Food Inflation Variability
- Food inflation, a significant driver of the inflation surge in July and August, decreased to 6.6% in September.
- However, this drop was primarily due to a sharp decline in vegetable prices. At the same time, inflation accelerated for pulses, fruits, eggs, and sugar.
- Cereals and spices continued to experience sticky inflation, with rates at 11% and 23.1%, respectively.
- Rural inflation remained higher than urban inflation, and concerns persist due to an erratic monsoon's impact on crop sowing and uncertainties regarding El Niño effects on the rabi crop. Weak rural demand and ongoing food price pressures are causes for concern for the economy.
8. Potential Fuel Price Challenges
- The government has maintained retail fuel prices since May but may consider reducing them ahead of important elections.
- On the other hand, producers, grappling with rising global oil and gas prices, have been increasing prices for two consecutive months.
- In September, global oil and gas prices surged at an eight-month high rate of 15.6%.
- Additionally, prices for urea, which India largely imports, have increased by 20% since March and are expected to impact retail prices.
9. The Way Forward
The recent inflation figures may seem comforting, but the economy still faces challenges in maintaining the desired inflation levels. Food and fuel prices, especially in the face of global price trends, continue to be factors of concern, and efforts to keep inflation within the tolerance range will demand ongoing attention and policy adjustments.
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For Prelims: Inflation, retail Prices, RBI, Food Inflation, El Nino,
For Mains:
1. Discuss the significance of the Reserve Bank of India's (RBI) inflation tolerance range and its role in maintaining price stability in the Indian economy. How does the RBI's monetary policy framework address inflationary pressures while balancing economic growth objectives? (250 Words)
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Previous Year Questions
1. La Nina is suspected to have caused recent floods in Australia. How is La Nina different from El Nino? (UPSC CSE 2011 )
Which of the statements given above is/are correct?
(a ) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: D
2. The seasonal reversal of winds is the typical characteristic of (UPSC CSE 2014 ) (a) Equatorial climate
(b) Mediterranean climate
(c) Monsoon climate
(d) All of the above climates
Answer: C
3. With reference to ‘Indian Ocean Dipole (IOD)’ sometimes mentioned in the news while forecasting Indian monsoon, which of the following statements is/are correct? (UPSC CSE 2017 )
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: B
4. Consider the following statements: (UPSC CSE 2015)
Which of the statements given above is/are correct?
(1) 1 only
(2) 2 only
(3) Both 1 and 2
(4) Neither 1 nor 2
Answer: B
5. Read the following passage and answer the question that follows. Your answers to these items should be based on the passage only.
Policymakers and media have placed the blame for skyrocketing food prices on a variety of factors, including high fuel prices, bad weather in key food producing countries, and the diversion of land to non-food production. Increased emphasis, however, has been placed on a surge in demand for food from the most populous emerging economics. It seems highly probable that mass consumption in these countries could be well poised to create a food crisis.
With reference to the above passage, the following assumptions have been made: (UPSC 2021)
1. Oil producing countries are one of the reasons for high food prices.
2. If there is a food crisis in the world in the near future, it will be in the emerging economies. Which of the above assumptions is/are valid?
A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
Answer: D
6. India has experienced persistent and high food inflation in the recent past. What could be the reasons? (UPSC 2011)
1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30.
2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change.
3. The food supply chain has structural constraints.
Which of the statements given above are correct?
A. 1 and 2 only B. 2 and 3 only C. 1 and 3 only D. 1, 2 and 3
Answer: B
7. With reference to inflation in India, which of the following statements is correct? (UPSC 2015)
A. Controlling the inflation in India is the responsibility of the Government of India only
B.The Reserve Bank of India has no role in controlling the inflation
C. Decreased money circulation helps in controlling the inflation
D. Increased money circulation helps in controlling the inflation
Answer: C
8. With reference to the Agreement at the UNFCCC Meeting in Paris in 2015, which of the following statements is/are correct? (UPSC 2016)
1. The Agreement was signed by all the member countries of the UN and it will go into effect in 2017
2. The Agreement aims to limit greenhouse gas emissions so that the rise in average global temperature by the end of this century does not exceed 2°C or even 1.5°C above pre-industrial levels.
3. Developed countries acknowledged their historical responsibility in global warming and committed to donate $ 1000 billion a year from 2020 to help developing countries to cope with climate change.
Select the correct answer using the code given below:
A. 1 and 3 only B. 2 only C. 2 and 3 only D. 1, 2 and 3
Answer: B
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Source: The Hindu
