Why inflation is rising in India, Pg10

Key Highlights:

• India is experiencing a significant rise in inflation, with Wholesale Price Index (WPI) inflation nearing 10% in June.
• The increase in WPI inflation is primarily driven by rising fuel and power prices and manufactured product prices.
• Fuel and power prices are largely influenced by imported crude oil costs.
• Food prices have also increased, potentially due to adverse monsoon conditions linked to the El Niño effect.
• The article highlights a structural difference where primary commodity prices are demand-determined, while industrial prices are cost-determined.

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Detailed Insights:

• WPI measures the average change in prices of goods at the wholesale level, indicating inflationary pressures before they reach consumers.
• The article attributes the rise in manufactured product prices to increased material costs, particularly oil, rather than wage increases.
• According to Polish economist Michal Kalecki's theory, primary commodity prices fluctuate with demand-supply mismatches, while industrial prices are determined by production costs.
• For primary articles like food, supply is relatively fixed, so a decline (e.g., due to bad monsoon) leads to price increases, indicating demand-pull inflation.
• For manufactured goods, supply can adjust to demand, making prices primarily dependent on production costs, leading to cost-push inflation.
• Proposed solutions include investing heavily in irrigation infrastructure to reduce agriculture's dependence on monsoons.
• For manufactured goods, a countercyclical indirect tax policy is suggested to manage fuel and power costs by adjusting customs and excise duties.

Key Concepts Involved:

• Wholesale Price Index (WPI): An index that measures the average change in the prices of commodities at the wholesale level.
• Demand-pull inflation: Occurs when aggregate demand in an economy outpaces aggregate supply, leading to a general rise in prices.
• Cost-push inflation: Occurs when the overall prices increase due to increases in the cost of wages and raw materials.
• El Niño effect: A climate pattern describing the unusual warming of surface waters in the eastern tropical Pacific Ocean, often leading to altered weather patterns globally, including droughts in some regions.
• Countercyclical indirect tax policy: A fiscal policy where indirect taxes (like customs and excise duties) are adjusted to counteract economic cycles, for example, reducing them during inflationary periods to lower costs.