Key Inputs on Inflation from RBI’s Bulletin

Key Inputs on Inflation from RBI’s Bulletin

News: RBI’s December Bulletin focused on how India’s inflation is affected by Demand and supply side measures.

What is Inflation?
• In economics, inflation is a general increase in the prices of goods and services in an economy over a period of time.
• When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

Key Findings in RBI’s Bulletin:
• Using the Centre for Monitoring Indian Economy’s data, the bulletin categorizes inflation based on price and quantity shifts. When both rise, it’s demand-driven; if they move oppositely, it’s supply-driven.
• Events such as a) COVID-19 Restrictions- Lockdowns caused production declines, leading to supply shortages, b) Excess Rainfall (2019-2020)- it led to supply disruptions, especially for agricultural products and c) Russia-Ukraine war increased supply side issues. All the above are reason of Supply driven inflation.
• Demand Driven inflation includes factors such as Post lockdown recovery which led to rise in demand, vaccine distribution which eventually opened the economy.
• Between January 2019 to May 2023, supply factors contributed to about 55% of CPI headline inflation. In contrast, demand factors dropped to 27.1% in 2020 from 41.5% in 2019 but rose again post-COVID19 and during the Russia-Ukraine conflict.
• Supply Constraints item: Vegetables, oils, fats, milk, eggs, pulses, sugar.
• Items that led to High demand: Non-alcoholic beverages, personal care, health related goods.