Imported inflation

Context

   The Asian Development Bank (ADB) recently warned that India could face imported inflation as the rupee could depreciate amid the rise in interest rates in the West.

Imported Inflation

   It refers to the rise in the prices of goods and services in a country, caused by an increase in the price or the cost of imports into the country.

   It is believed that a rise in input costs pushes producers to raise the price they charge from their local customers.

Causes

   Depreciation of a Currency: When a country’s currency depreciates, people in the country will have to shell out more of their local currency to purchase the necessary foreign currency required to buy any foreign goods or services.

   It effectively means that they will be paying more for anything that they import.

   Rise in International Crude Oil Prices: It is due to a fall in oil output. It is expected to cause prices to rise across an economy which imports oil to produce goods and services.

Impact

   Imported inflation can lead to higher prices for goods and services, which can reduce purchasing power and lead to a decrease in consumer spending.

   It can slow down economic growth and lead to economic instability.

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