Imported Inflation

Imported Inflation

Subject:  Economy

Section: Inflation and Unemployment

When the general price level rises (considerable and persistent over a longer period of time) in a country because of the rise in prices of imported commodities, inflation is termed as imported inflation. For example-Two key contributors to India’s imports are: Crude Oil and Gold. Rise in prices of these two products lead to rise in the import bill of the country thus a major cause of imported inflation in India.

Causes-

• Rise in price of Imported commodities-
  • Demand pull cause- Mainly due to rise in Aggregate Demand of the good relative to its Aggregate Supply, For example-  post pandemic demand recovery led to rise in demand of crude oil relative to its supply leading to rise in price.
  • Cost push cause- mainly due to supply shortage of inputs. For example- the recent Ukraine War has led to blockage of Black sea and thus the supply of critical inputs- palladium, neon etc.. Used in production of semiconductor chips and catalytic converters used in vehicles.
• Supply chain disruption- 
  • Ukraine war- Russia and Ukraine being the major supplier of critical raw materials-coal, palladium, fertilizers; crude oil and natural gas; agri commodities like wheat, corn, sunflower oil, base metals- aluminum, steel etc.
  • Economic sanction- like the Russian bank prohibited from SWIFT could lead to delay in supply of various consignments.
  • Trade War- recent China- USA trade war
  • Pandemic- and the induced lockdown caused disruption of transport services.
• Depreciation of domestic currency-inflation may also rise due to the depreciation of the domestic currency, which pushes up the rupee cost of imported items.

Impact-

• Reduces purchasing power of currency.
• Rise in import bill and current account deficit.
• Capital outflows as the real rate of interest falls.
• Currency depreciation.
• Reduces productive investment and shifts to unproductive investment- real estate, gold etc.
• Rise in unemployment in the long run due to reduced investment.
• Lowers cost of borrowing as real rate of interest decreases.
• Long run reduction in real GDP-singles end of easy monetary policy.
• Supply chain disruption hamper industrial growth.

Losers and winners