Cost-push inflation is driving up prices throughout the Indian Economy

Inflation in India, the fifth largest economy in the world, stood at 6.9% in July according to the latest measurement of the CPI (consumer price index). This means that inflation in India has been above the Reserve Bank of India’s inflation target of 4% (+/- 2%) for four consecutive months.

Whilst it is common to associate increasing prices with strong levels of demand and a buoyant economy, the inflationary pressure in India is supply-side in nature.

With the country hit hard by the spread of Covid-19, the government has enforced strict lockdown measures to keep people at home. The result has been a decrease in demand for all sorts of goods and services, but more significant has been the impact on supply.

The lockdown and other measures to slow down the spread of Covid-19 has had a huge impact on Indian supply-chains, with food and beverages disproportionately affected. With supply-side disruptions causing many products to remain unmoved, prices are being pushed upwards; food and beverage inflation was measured at 8.7% in July.

The current economic situation in India presents a dilemma for their policy makers. On the one hand, inflation is increasing and they need to be aware of the long-term impact as consumer’s purchasing power gets eroded. But on the other hand, demand is low and growth sluggish. If the government puts too much emphasis on stimulating demand whilst the current inflation issue persists, this could lead to further inflationary pressure.

Indian policy makers will be hoping that the cost-push inflation from supply-side disruption will only be temporary, quickly subsiding once life gets back to normal and goods are able to move freely across the country. This will enable them to consider the possibility of expansionary fiscal policy to stimulate demand and economic growth, without the threat of high inflation.