Governments across the world have responded to the pandemic by increasing fiscal spending. At the same time, central banks have increased liquidity. In the US, there are fears that expansionary fiscal and monetary policies could lead to overheating. This could translate into a sharp increase in US inflation as people step up spending with the economy getting back on track with the help of vaccines.
In India, consumer price index (CPI) inflation stood at 5.52 percent in March compared to 5.03 percent in February and 4.06 percent in January. The rise in CPI inflation was driven by an increase in fuel and transportation costs along with an increase in some components of the food basket, Moreover, the record Covid-19 surge across the country now, especially at a time when advanced economies have already started recovering, could put serious upward pressure on inflation.
Higher global inflation, rising commodity prices, local lockdowns, and a weaker rupee could bring in higher prices in India.
SUPPLY DISRUPTIONS
While some in the US are worried about inflation rising mainly due to demand side-effects, in India supply-side factors are also expected to make a dent, As Covid cases surge and deaths rise, collapsing health systems could push state and city governments to impose curfews and restrictions on movement. Local lockdowns and supply disruptions are likely to stay for a while.
Even though the government and businesses are better prepared than they were last year, the preparation is unlikely to suffice for the kind of surge being seen now. It appears that no one expected a second wave of this magnitude, These supply disruptions could in themselves cause higher prices.
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