Transitory as inflation is termed by the Central banks, but its threat to recovery could be real

Transitory is termed by the Central banks, its threat to recovery could be real

“Transitory” is increasingly part of the inflation narrative both in India and globally. It all-around has been higher than expected and running at a faster pace than in the last few decades. Central Banks have described it as transitory because they are mainly driven by one-off factors. Banks expect elevated price increases on the back of one-off factors which are not sustainable. transitory inflation in no way implies a brief or short-lived period of price rise. Transitory as inflation is termed by the Central banks, but its threat to recovery could be real

In May this year, the annual retail inflation rate rose higher than the prescribed target for RBI in India. Wholesale price inflation is also running higher than it has been for almost three decades. High inflation has assumed permanence throughout the year.

The transitory part is the very temporary inflation from a set of quirks related to the economy’s reopening impacting core prices. The unusual dynamic could also last much beyond the next few months and will only reduce when the manufacturing costs come down.

RBI believes that it will only need to worry about entrenched inflation when demand returns.

It may also pose the biggest threat to the current nascent economic recovery. RBI might be discounting the danger of inflation because of the context of the pandemic. At this time when the government is also running massive fiscal deficits and many central banks worldwide are beginning to consider how to pause or pare their accommodative stances.

 

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