Inflation may be a result of two factors i.e Cost lead or Demand lead or both.
Global inflation is mainly cost lead but in Indian context it is both.
What is Cost lead ?
Inflation due to increase in cost of production, this may be due to increase
in wages and salaries or increase in raw materials cost.
What is Demand lead ?
Increase in prices of commodities that consumers purchase due to increase
in overall levels of quantity demanded. When the companies cannot increase
the production significantly to offset the increase in demand, this leads to
increase in price and in turn inflation.
increase in price and in turn inflation.
Global Scenario
In the Global context it is mainly commodity lead inflation that is raw materials like
Metals- copper, steel, aluminum etc.
Crude oil and its derivatives-petrol and diesel etc..
Indian Scenario
In case of India it was Cost lead and Demand lead. As the crude and metal
prices were sky rocketing it was inevitable for business firms to withhold from
passing on this increase to the consumers. This is visible in prices of manufactured
outputs like steel, cement, and other kinds of house hold items manufactured from
them. Crude oil which moved from around 55 $ per barrel in April 2007 to 100 $
in April 2008 and was hovering at around 145 $ per barrel in July 2008.
Since crude oil is the essential commodity linked to the price off all goods and services
produced in today’s market economy. This lead to increase in prices of almost all goods
and services. Between 2004 and 2008 Indian economy averaged GDP growth rate
of more than 8% and consequently higher levels of income. This increase in income
lead to higher levels of commodity price and inflation.So when we look at Indian
context of inflation it is the result of demand and cost lead inflation.
prices were sky rocketing it was inevitable for business firms to withhold from
passing on this increase to the consumers. This is visible in prices of manufactured
outputs like steel, cement, and other kinds of house hold items manufactured from
them. Crude oil which moved from around 55 $ per barrel in April 2007 to 100 $
in April 2008 and was hovering at around 145 $ per barrel in July 2008.
Since crude oil is the essential commodity linked to the price off all goods and services
produced in today’s market economy. This lead to increase in prices of almost all goods
and services. Between 2004 and 2008 Indian economy averaged GDP growth rate
of more than 8% and consequently higher levels of income. This increase in income
lead to higher levels of commodity price and inflation.So when we look at Indian
context of inflation it is the result of demand and cost lead inflation.
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