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Ecophase

June 21, 2022

Nowadays, the global economy is facing the biggest challenge of controlling inflation. With concern to this destructive situation Apex Banks are paying adequate attention and making sensible policy. Inflation is a general increase in the prices of goods and services in the economy which decreases the purchasing power of the money.

The Consumer Price Index (CPI) is the price index of weighted average market basket of consumer goods and services purchased by households. The US economy is under pressure due to the highest inflation in April 2022 in the last two decades. The CPI was 8.5% in the month of March 2022 which declined in the US. In May 2022, Fed Bank raised interest rates by 50 basis points which is the biggest move in the last two decades to fight inflation. The Fed had been buying bonds to keep interest rates low and money flowing through the economy during the pandemic, but surged in prices has forced a dramatic rethinking in monetary policy. The graph-1 indicates that there is no significant impact after rate hike by Fed in March.

Graph – 1: Consumer Price Index (US)

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India is also facing the challenge of high inflation. In India, the most important category in the consumer price index is food and beverages i.e. 45.86 per cent of total weight. As per graph-2 Retail inflation surges to an 8 year high of 7.79 per cent in April 2022 driven by rising fuel and food prices which remained above the Reserve Bank of India’s  6 per cent upper tolerance level for the fourth consecutive month. In April 2022, rural inflation rose to 8.38 per cent from 7.66 per cent in March 2022 and from 3.75 per cent in April 2021. In April 2022, urban inflation stood at 7.09 per cent from 6.12 per cent in March 2022 and 4.81 per cent in April 2021. Food basket inflation surged 8.38 per cent in April as compared to 7.68 per cent in March.

Graph – 2: Consumer Price Index (India)

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Due to higher vegetable and cooking oil prices globally, food inflation can remain elevated. Food inflation accounts for nearly half of the consumer price index. In the last four years, the first time the elevated price outlook pushed the Reserve Bank of India (RBI) to lift its repo rate by 40 basis points which indicated that future rate hikes would bring down surging inflation

Author: Dr. Himanshu Barot, Professor - Unitedworld School of Business (UWSB)

Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.

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