Inflation can be defined as a persistent rise in the general price of goods and services of common or daily use — such as clothing, food, fuel, transport, etc — which results in an increase in the cost of living. Inflation is the measure of change in average price of services and commodities, done at regular intervals.I nflation levels have risen from a low of 4% before covid crisis to above 6% after the crisis. Multiple reasons are responsible for the sudden and consistent rise in Inflation levels across the world.
Expansionary Fiscal policy as relief measures- Governments across the world have released very generous relief measures to counter the sudden impact of covid-19 led lockdowns. These measures were meant to put money in the hands of the people, to support industries and to give a psychological support that all is well. India’s relief measures were upto Rs 20 lakh crore. Similarly, USA came out with financial stimulus of 2 trillion dollars. An expansionary fiscal policy automatically increases inflation by putting too much money after too little goods.
Expansionary monetary policy by central banks- Central banks have a sensitive task of inflation targeting while keeping in mind economic growth. Due to covid, economic growth decelerated to - 23% in the first wave in India. In order to drive growth, central banks have followed an expansionary policy so that there can be enough liquidity in the system to drive demand and supply. The cash in circulation in India has increased from 17 lakh crore in 2016 to 28 lakh crore in 2020 due to this expansionary policy. A side-effect of this policy is high inflation, which if not targeted can destroy the basic economic structure of a country.
There are various natural causes of Inflation as well-
Cost push Inflation- Due to limited supply of raw materials and increasing prices of crude oil, cost of production has been going up around the world. International Trade and Transport has also become costlier to recover the losses of 2020. A higher cost of production ultimately means higher price for the consumer.
Suppressed demand- People want to save whenever there is a crisis situation. Due to covid crisis, savings of people have skyrocketed. This has resulted in a suppressed demand in the economy. As per a report, people have saved upto 12% of GDP in USA alone in 2020. This is a natural reaction out of uncertainty. Less demand depresses economic growth, which fuels expansionary policies by the governments, that fuels inflation.
High and consistent Inflation has the potential to push countries into recession so it should be tackled seriously at a Global level to maintain long term financial stability and sustainability