RURAL INFLATION

General Studies 3 >> Economy

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RURAL INFLATION

INFLATION IN RURAL INDIA

1. About

Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.
The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change.
Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.

2. What Causes inflation

3. Types of Inflation

Demand-pull inflation happens when the demand for certain goods and services is greater than the economy's ability to meet those demands. When this demand outpaces supply, there's upward pressure on prices — causing inflation.

Cost-push inflation is the increase of prices when the cost of wages and materials goes up.
These costs are often passed down to consumers in the form of higher prices for those goods and services.
An example of this would be lumber, as lumber is an input good for houses.
When the cost of lumber spiked as much as 400% earlier in 2021 it had an impact on the increase in housing prices resulting in inflation.

3.3. Increased money supply

Increased money supply is defined as the total amount of money in circulation, which includes cash, coins, balances and bank accounts according to the Federal Reserve.
If the money supply increases faster than the rate of production, this could result in inflation, particularly demand-pull inflation because there will be too many dollars chasing too few products.
An increase in money supply is usually created by the Federal Reserve through a process called Open Market Operations (OMO).

Devaluation is a downward adjustment in a country's exchange rate, resulting in lower values for a country's currency.
The devaluation of a currency makes a country's exports less expensive, encouraging foreign nations to buy more of the devalued goods.
Devaluation also makes foreign products for the devaluing country more expensive which encourages citizens of the devaluing country to buy domestic products over imports.
China is perhaps most known for this tactic as the United States and other nations have frequently accused China of working to devalue the Yuan over the years.

Rising wages is exactly what it sounds like — an increase in what's being paid to workers. "Wages are a cost of production," adds Baker.

"If wages rise a large amount, businesses will either have to pass the cost on or live with lower margins. The exception is if they can offset wage growth with higher productivity."

However, economists remain mixed on the impact of gradual increases in wages, like raising the minimum wage, compared to faster, more sudden wage growth seen in places like Silicon Valley. Some believe that an increase in wages could result in cost-push inflation due to the higher cost to businesses, while others believe that higher wages across the board (not just concentrated in certain sectors) will also increase demand enough to offset a spike in prices.
"Rising wages should allow consumers to combat inflation, especially if the wages are rising at the same or a faster rate than the inflation rate," adds Susanne L. Toney, PhD, endowed chair of Business and Economics at Hampton University. "The rising wages allow consumers to pay higher prices without impacting their purchasing power."

Certain policies can also result in either a cost-push or demand-pull inflation.
When the government issues tax subsidies for certain products, it can increase demand. If that demand is higher than supply, costs could rise.
Additionally, stringent building regulations and even rent stabilization policies could inadvertently increase costs and create an inflationary environment by passing those costs to residents or artificially reducing the supply of housing.

4. Sections Affected by Rural Inflation

While high inflation affects the poor the most in general, the fact that price rise in food is driving the current surge.
Also, the food inflation is expected to rise along with both fuel and core inflation (excluding food and energy prices).
The bottom 20% of the population in urban as well as rural India is facing the worst effects.
The rural bottom 20% faced the highest inflation at 7.7% in March, while the upper 20% of the income segment in the rural area experienced 7.6% inflation.

5. Prime factor causing inflation

Rural distress is evident in falling farm incomes and food disinflation but services inflation has remained high even in rural India, adding to the complications for policymakers.
While food price risks have risen due to the Russia-Ukraine conflict, higher prices for farm sector inputs could further drive food inflation.

6. Way Forward

The cost of production is likely to increase by around 8-10% and the MSP should at least be higher by around 12%-15%.
With a normal monsoon anticipated this year, this would determine whether rural consumer demand will rebound or remain constricted in upcoming months.

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