Why is inflation systemic now?

Why is inflation systemic now?

Subject : Economy

Context:

Since May, the Reserve Bank of India has raised the repo rate by 190 basis points yet it hasn’t checked credit growth so far making inflation systemic .

Concept:

Systemic Inflation

• It  implies higher prices for general goods and services over a longer and sustained period of time.
• The nature of the forces behind the inflation are more systemic (permanent and structural) than transient.
• It generally involves higher core inflation, which is the inflation of items excluding food, fuel, light items, and petrol, diesel and other fuels for vehicles.

Causes:

• Rise in commodity prices- other than food and fuel i.e. the Core inflation– typically rises and falls more gradually than inflation in food and fuel.
• Wage price spiral-high inflation that has seeped into wage inflation as people have demanded higher wages to compensate for higher prices which in turn further increase demand and inflation.
• Rising inflation expectation-mainly due to sustained buoyancy in commodity prices
• Global issues-supply shocks, large swings in capital flows and global spillovers from financial market volatility.
• Structural changes– changes in labour laws, industrial policies leading to supply shortages.It also include increased import demand and commodity-specific demand–supply imbalances.
• Rise in non food credit growth-it includes credit to various sectors of the economy (Agriculture, Industry, and Services) and also in the form of personal loans.
  • The food credit indicates the lending made by banks to the Food Corporation of India (FCI) mainly for procuring foodgrains. It is a small share of the total bank credit.