Pandemic and Inflation

Subject : Economy

Section : Inflation

Context

Inflation has risen around the world, across major economies.

How did the pandemic lead to inflation?

Supply constraint– cost push inflation led the surge in energy, food, non-food commodities, input prices and rising freight costs
Lockdown– structural inflation
Base effect-earlier lower inflation
Pent up demand and fiscal spending -demand pull inflation.

Concept:

Structural inflation

Structuralist Inflation is another form of Inflation mostly prevalent in the Developing and Low-Income Countries.
The Structural school argues that inflation in developing countries is mainly due to the weak structure of their economies.
The Structuralist argues that the economies of developing countries like Latin America and India are structurally underdeveloped as well as highly volatile due to the existence of weak institutions and imperfect working of markets.
As a result of these imperfections, some sectors of the economy like agriculture will witness shortages of supply, whereas some sectors like consumer goods will witness excessive demand. Such economies face the problem of both shortages of supply, under utilisation of resources as well as excessive demand in some sectors.
Example: In India, let’s assume that the farmer produces fruits and vegetables at 10000 per quintal. But the final consumer gets the same at 20000 per quintal. The huge disparity between what farmer receives and consumer pays is due to infrastructure and agriculture bottlenecks. The bottleneck arises mainly due to lack of roads, highways, cold chains and underdeveloped agriculture markets. All these increases the cost of transporting goods from farmers to consumers leading to inflation