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Inflation surges to 8.1%

May 30, 2008

What is the reason for inflation?

  • Economists attribute inflation to a demand-pull theory. According to this, if there is a huge demand for products in all sectors, it results in a shortage of goods. Thus prices of commodities shoot up.

  • Another reason for inflation is the cost-push theory. It syas that labour groups also trigger inflation. When wages for labourers are increased, producers raise the prices of products to make up for salary hike.

  • The rising prices of food products, manufacturing products, and essential commodities have pushed inflation rate further in India.

  • Spiralling global crude oil prices have worsened the situation. Sometimes, banks create more liquidity by allowing more loans for people, giving them the purchasing power to buy more, as a result of which prices are driven up further.

  • The demand-supply gap also drives inflation rates.

  • Increase use of bio-fuels: Many Western countries have promoted bio-fuels as an alternative to petroleum. This has led to significant shifts in acreage as well as use of certain foodgrains. For example, Brazil uses sugarcane to make bio-fuel and the European Union uses imported vegetable oils to make bio-fuel. This has reduced the available land for producing food the world over. As global food and commodity prices rise, the impact is felt by India too.
  • Neglect of agriculture: The prolonged agrarian crisis in many parts of the developing world; excessive use of groundwater and inadequate attention to preserving or regenerating land and soil quality; lack of attention to relevant agricultural research and extension; overuse of chemical inputs that have long-run implications for both safety and productivity have cumulatively led to inflation.
  • A change in market structure: This allows for greater international speculation in commodities. It is often assumed that rising food prices automatically benefit farmers, but this is far from the case, especially as the global food trade has become more concentrated and vertically integrated.

    Image: A trader checks the quality of grains at a wholesale market in Mumbai on April 29, 2008.

    Photograph: Pal Pillai/AFP/Getty Images

    Also read: Inflation, the silent killer

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