The Indian government’s ministry of statistics provided data on inflation, confirming fears of a rising-price spectre in the midst of an already-fragile economic recovery. Overall retail inflation in India was around 6%, according to the consumer price index (CPI), and has been continuously growing since September 2021. Given the double-digit levels experienced in the past, this may not appear to be excessive, but the rise in food inflation is a cause for concern. Food inflation was less than 1% in September-October 2021, but by January 2022, it had risen to 5.4 percent overall and 5.9 percent in urban areas. Apart from the obvious suspects of fruits and vegetables, edible oils have experienced persistently high price inflation, with an average price increase of 24 percent over the last 18 months. Cereal inflation, which increased to 3.4 percent in January following eight months of negative inflation, a solid record that was disrupted last September, is one of the newcomers to this list of specific concerns.
What is the inflation rate for 2021?
The United States’ annual inflation rate has risen from 3.2 percent in 2011 to 4.7 percent in 2021. This suggests that the dollar’s purchasing power has deteriorated in recent years.
What is the inflation rate in China?
Inflation in China was 2.42 percent in 2020, down 0.48 percent from 2019. In 2019, China’s inflation rate was 2.90 percent, up 0.82 percent from 2018. The annual inflation rate in China was 2.07% in 2018, up 0.48 percent from 2017. In 2017, China’s inflation rate was 1.59 percent, down 0.41 percent from 2016.
Is inflation beneficial or harmful?
- Inflation, according to economists, occurs when the supply of money exceeds the demand for it.
- When inflation helps to raise consumer demand and consumption, which drives economic growth, it is considered as a positive.
- Some people believe inflation is necessary to prevent deflation, while others say it is a drag on the economy.
- Some inflation, according to John Maynard Keynes, helps to avoid the Paradox of Thrift, or postponed consumption.
What is Sri Lanka’s inflation rate?
Sri Lanka is experiencing an unparalleled economic catastrophe. While the island nation’s difficulties have been simmering for years, spillovers from the Ukraine crisis have pushed it over the brink.
In terms of the US dollar, the Sri Lankan rupee has hit a new low. Inflation is in the double digits on an annual basis. Import restrictions are in place. And the country is on the verge of going bankrupt.
As a result, power outages are common. Fuel, food, and medicine all of which are imported are in short supply, and rising prices are pushing what is still affordable to many Sri Lankans out of reach. Even printing paper is scarce, causing schools to postpone exams. The issues have spurred the largest demonstrations in years. To put a stop to them, troops have been dispatched.
Sri Lanka is now seeking aid from other countries, notably its two largest economic partners. China is considering extending an additional $2.5 billion in addition to the $2.8 billion previously extended, while India has pledged $2.4 billion. And President Gotabaya Rajapaksa’s government is currently negotiating a larger loan package with the International Monetary Fund and the World Bank – something he had previously rejected in order to avoid the typically onerous terms they demand.
Many of the measures that led to the current crisis I witnessed directly as an economist and former officer at the Central Bank of Sri Lanka. And now, if the government can not find a long-term solution, Asia’s oldest democracy’s economic, financial, and political stability are all at jeopardy.
Wild growth
Sri Lanka very recently emerged from a terrible and costly 26-year civil war after gaining independence from Britain in 1948.
The war was fought between the government forces and armed separatists from the Tamil-speaking minority in this predominantly Sinhalese country. Civilians and their belongings were frequently targeted.
In 2006, near the end of the war, the government attempted to revive recovery by borrowing significantly and propping up the rupee in order to attract foreign investments. The technique worked in the short run. The economy grew rapidly, with per-capita GDP rising from $1,436 in 2006 to $3,819 in 2014, putting Sri Lanka ahead of Ukraine, the Philippines, and Indonesia.
This helped to bring 16 lakh people out of poverty, accounting for 8.5 percent of the population, and created a significant middle class. Sri Lanka had risen to the World Bank’s list of “upper middle-income” countries by 2019.
However, because all of that expansion came at a cost, the designation only lasted a year. Between 2006 and 2012, Sri Lanka’s external debt tripled, bringing the total state debt to 119 percent of GDP.
These policies were temporarily discontinued in 2015, allowing the economy to stabilize at a slower rate of growth, but the debt continued to climb.
Pandemic and war
Tourists, who spent $5.6 billion in 2018 and helped Sri Lanka close its $10 billion trade imbalance, vanished almost overnight.
This was a huge hit to the economy, especially since the government’s coffers had been depleted by a significant tax cut the previous year. In 2020, just paying interest on that massive debt consumed 72 percent of government revenue, forcing the central bank to issue more money in order to avoid default, stoking inflation.
Fortunately for the government and its population, Sri Lankans living abroad continued to send $7 billion in remittances home every year.
However, in 2021, when many economists and analysts advised Sri Lanka to seek foreign assistance, the central bank focused instead on borrowing from its neighbors, maintaining the value of the Sri Lankan currency, and limiting imports.
Export restrictions resulted in shortages of vital items such as cooking gas and milk, while currency defense depleted Sri Lanka’s foreign reserves. Furthermore, when the black market value of the rupee declined, remittances began to decline, prompting people to avoid converting US dollars to Sri Lankan rupees at the official rate or through official channels. Annual inflation has been estimated to be as high as 55%, contrary to the official rate of 14%.
By March, the government had been compelled to reverse course due to the repercussions of the war in Ukraine, which had driven up international prices of oil, wheat, and a variety of other commodities. Aside from the impact on the cost of imported products, the war has put Sri Lanka’s tourism economy in jeopardy, with flights to Moscow currently suspended. Prior to the conflict, Russians accounted for the majority of Sri Lankan tourists, with Ukrainians coming in second.
Sri Lankan authorities have little choices but to allow the rupee to weaken a move that is likely to save billions of dollars every year and seek IMF aid. To make its massive debt load more manageable, Sri Lanka would most likely have to restructure it by asking foreign bondholders to accept less than 100 percent of the value of their investments.
Perilous situation
The policy may be succeeding, but it will come at a tremendous cost to Sri Lankans for a long time.
Over 350 “non-essential” commodities, including as milk, oranges, and household appliances, are now prohibited from entering the country.
And the small supply of remaining commodities is becoming more pricey by the day. Cooking gas, for example, is nearly three times more expensive than it was just five months ago.
Sri Lanka’s economic and financial situation might be stabilized by obtaining loans from the International Monetary Fund and the World Bank, as well as short-term financing from China and India. However, with mounting protests and the lenders’ demand for austerity measures expected to be unpopular, the administration may struggle to stay in power for long.
What is the inflation rate in the United Kingdom?
The UK’s annual inflation rate rose to 6.2 percent in February 2022, up from 5.5 percent in January, and was higher than market expectations of 5.9 percent. As the cost of energy and food continues to rise, the inflation rate has reached its highest level since March 1992.
What will be the rate of inflation in 2022?
According to a Bloomberg survey of experts, the average annual CPI is expected to grow 5.1 percent in 2022, up from 4.7 percent last year.
How is inflation beneficial?
Inflation is and has been a contentious topic in economics. Even the term “inflation” has diverse connotations depending on the situation. Many economists, businesspeople, and politicians believe that mild inflation is necessary to stimulate consumer spending, presuming that higher levels of expenditure are necessary for economic progress.
How Can Inflation Be Good For The Economy?
The Federal Reserve usually sets an annual rate of inflation for the United States, believing that a gradually rising price level makes businesses successful and stops customers from waiting for lower costs before buying. In fact, some people argue that the primary purpose of inflation is to avert deflation.
Others, on the other hand, feel that inflation is little, if not a net negative on the economy. Rising costs make saving more difficult, forcing people to pursue riskier investing techniques in order to grow or keep their wealth. Some argue that inflation enriches some businesses or individuals while hurting the majority.
The Federal Reserve aims for 2% annual inflation, thinking that gradual price rises help businesses stay profitable.
Understanding Inflation
The term “inflation” is frequently used to characterize the economic impact of rising oil or food prices. If the price of oil rises from $75 to $100 per barrel, for example, input prices for firms would rise, as will transportation expenses for everyone. As a result, many other prices may rise as well.
Most economists, however, believe that the actual meaning of inflation is slightly different. Inflation is a result of the supply and demand for money, which means that generating more dollars reduces the value of each dollar, causing the overall price level to rise.
When Inflation Is Good
When the economy isn’t operating at full capacity, which means there’s unsold labor or resources, inflation can theoretically assist boost output. More money means higher spending, which corresponds to more aggregated demand. As a result of increased demand, more production is required to supply that need.
To avoid the Paradox of Thrift, British economist John Maynard Keynes argued that some inflation was required. According to this theory, if consumer prices are allowed to decline steadily as a result of the country’s increased productivity, consumers learn to postpone purchases in order to get a better deal. This paradox has the net effect of lowering aggregate demand, resulting in lower production, layoffs, and a faltering economy.
Inflation also helps borrowers by allowing them to repay their loans with less valuable money than they borrowed. This fosters borrowing and lending, which boosts expenditure across the board. The fact that the United States is the world’s greatest debtor, and inflation serves to ease the shock of its vast debt, is perhaps most crucial to the Federal Reserve.
Economists used to believe that inflation and unemployment had an inverse connection, and that rising unemployment could be combated by increasing inflation. The renowned Phillips curve defined this relationship. When the United States faced stagflation in the 1970s, the Phillips curve was severely discredited.
Why is inflation in 2022 so high?
As the debate over inflation continues, it’s worth emphasizing a few key factors that policymakers should keep in mind as they consider what to do about the problem that arose last year.
- Even after accounting for fast growth in the last quarter of 2021, the claim that too-generous fiscal relief and recovery efforts played a big role in the 2021 acceleration of inflation by overheating the economy is unconvincing.
- Excessive inflation is being driven by the COVID-19 epidemic, which is causing demand and supply-side imbalances. COVID-19’s economic distortions are expected to become less harsh in 2022, easing inflation pressures.
- Concerns about inflation “It is misguided to believe that “expectations” among employees, households, and businesses will become ingrained and keep inflation high. What is more important than “The leverage that people and businesses have to safeguard their salaries from inflation is “expectations” of greater inflation. This leverage has been entirely one-sided for decades, with employees having no capacity to protect their salaries against pricing pressures. This one-sided leverage will reduce wage pressure in the coming months, lowering inflation.
- Inflation will not be slowed by moderate interest rate increases alone. The benefits of these hikes in persuading people and companies that policymakers are concerned about inflation must be balanced against the risks of reducing GDP.
Dean Baker recently published an excellent article summarizing the data on inflation and macroeconomic overheating. I’ll just add a few more points to his case. Rapid increase in gross domestic product (GDP) brought it 3.1 percent higher in the fourth quarter of 2021 than it had been in the fourth quarter of 2019. (the last quarter unaffected by COVID-19).
Shouldn’t this amount of GDP have put the economy’s ability to produce it without inflation under serious strain? Inflation was low (and continuing to reduce) in 2019. The supply side of the economy has been harmed since 2019, although it’s easy to exaggerate. While employment fell by 1.8 percent in the fourth quarter of 2021 compared to the same quarter in 2019, total hours worked in the economy fell by only 0.7 percent (and Baker notes in his post that including growth in self-employed hours would reduce this to 0.4 percent ). While some of this is due to people working longer hours than they did prior to the pandemic, the majority of it is due to the fact that the jobs that have yet to return following the COVID-19 shock are low-hour jobs. Given that labor accounts for only roughly 60% of total inputs, a 0.4 percent drop in economy-side hours would only result in a 0.2 percent drop in output, all else being equal.