Question

Coronavirus impact: India inflation likely to have hit six-month low in May: Poll

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India consumer price inflation is likely to have moderated to a six-month low in May on a softer rise in food prices as supply disruptions eased after businesses reopened from the coronavirus lockdown in many parts of the country, a Reuters poll found.

The June 4-9 poll of 35 economists showed that the consumer price index (CPI) was forecast to rise to 5.50% in May compared with a year ago.

Government statistics for April headline data were not published because of the lockdown, so the latest comparable figure is for March, which was revised down to 5.84% from 5.91% initially.

But some economists believe the May inflation data, scheduled for release on June 12 at 1200 GMT, will also be cancelled.

If publication goes ahead and the Reuters consensus forecast is realised, it would be the lowest inflation rate since November. But it would also mark the eighth consecutive month that inflation is above the Reserve Bank of India's medium-term target of 4.00 per cent.

"Food prices will be the biggest risk, but we do not see a material jump in inflation owing to lifting of the lockdown ... and rising unemployment numbers suggest demand-pull inflation will continue to be low," said Rini Sen, India economist at ANZ.

Some economists also expected price pressures for food to be moderate over the coming months based on expectations for the monsoon to be timely and normal.

Also, minutes of the latest unscheduled Reserve Bank of India meeting in late May, where it again cut the repo rate by 40 basis points to 4.00%, showed the central bank's policy focus is aimed at reviving the economy first before worrying about the inflation outlook.

"The upshot is that inflation should not be a barrier to further policy loosening. The RBI is likely to further ramp up policy support in its next meeting, or sooner in an unscheduled meeting," said Darren Aw, Asia economist at Capital Economics.

The poll forecast that India's industrial output as measured by the Index of Industrial Production, or IIP, also scheduled for release on June 12, was likely to have contracted by an annual 44.9% in April after shrinking 16.7% in March.

That was mainly due to a contraction of 38.1% in infrastructure output - made up of eight main industries - including coal, crude oil and electricity - and accounts for nearly 40% of the country's overall industrial production.

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Required Question:  Analyze the Article related to Inflation The use of graph and diagrams are preferred to explain theories.

Answer 1

INFLATION : In simple language Inflation can be defined as increase in price level of goods and services in an economy or decline in the purchasing power which means the same amount of money will now purchase less goods and services.

TYPES OF INFLATION :

1. COST PULL INFLATION : The rise in price level when cost of production increases in an economy.

2. DEMAND PULL INFLATION : When the overall demand for goods and services in an economy increases faster than the production level in the economy.

CONSUMER PRICE INDEX ( CPI) - AN INDICATOR OF INFALTION

A consumer price index measures changes in price level of a weighted average market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

The annual percentage change in a CPI isusd as a measure of inlation. A CPI can be used to index ( ie., adjust for the effect of infaltion) the real value of wages, salaries and pensions, to regulate prices and to deflate monetory changes  in real values.

Too much inflation is always bad for the economy as it always reduces value of money until and unless interest rates provided in the economy is higher than inflation rate.

CORONAVIRUS PANDEMIC - IMPACT ON ECONOMIC GROWTH AND INFLATION

Coronavirus disease ( Covid-19) has a deep impact on Indian economy. The large section of our indian economy has been hit badly by Covid-19 due to which GDP ( Gross domestic product) etsimates of India has been downgraded by several times by many rating agencies.The ongoing crisis in india will have a sizeable impact on consumption level which is the biggest component of our GDP.

The RBI has forecast the infaltion to collapsed to 2.4% in the fourth quarter of Financial Year 21 which is due to the reduced demand in the economy and which will further push RBI to cut interest rates. There has a steepest decline in India's industrial index since outbreak of Coronavirus.

The below graph shows the decline in retails sales in the fastest growing economies like China and US. Retail sales in any economy includes all durable and non durable consumer goods.

The below graph shows the expected decline in merchandize trade ( Difference between Export and Import value) in various majpr economies where is was already declining in 2019 and various steps were taken to improve the situation but the outbreak of Covid 19 has further made the situation worst.

The below graph is showing the rising level of prices ( Inflation) which reduces the purchaing power and the real value of money.

The below graph shows the impact of Coronavirus on world economy which is devastating. The red line in below grapgh shows the nominal income in the economy and the blue line shows median household income. The lay off from jobs ( Mostly middle income groups) which constitutes larges part of GDP for any economy and has hit hard so far.

CRUX:

The inflation level in food prices got increased at the timeof outbreak of Coronavirus but due to the timely fiscal measures ( Government intervention) , it had been controlled. However the predictions are not so positive and in the direction of Higher level of prices in future.RBI has also declined the  Repo rates by 40 basis points to ease monetory flow in the economy which will further accentuate inflation level. The main concern at the time of covid19 is to boost production level, to reduce job cuttings and to ease monetory and Fiscal policy in the economy.