iasindepth

Current Affairs 2023

Sticky Inflation - UPSC Current Affairs

Sticky inflation is a type of inflation that is slow to fall. It can be caused by a number of factors, including wage-price spirals, sticky prices, and expectations of inflation. There are a number of things that can be done to address sticky inflation, including monetary policy, fiscal policy, and structural reforms.

May 14, 2023

3 min read

Inflation is a general increase in prices and fall in the purchasing value of money. It is measured as the percentage change in prices over a period of time. Inflation can be caused by a number of factors, including:

1. Increase in the money supply: When there is more money in circulation, prices tend to rise.

2. Increase in demand: When demand for goods and services exceeds supply, prices tend to rise.

3. Increase in costs of production: When the cost of producing goods and services rises, businesses pass those costs on to consumers in the form of higher prices.

Sticky inflation is a type of inflation that is slow to fall. This can happen for a number of reasons, including:

1. Wage-price spiral: When wages rise, businesses pass those costs on to consumers in the form of higher prices. This can lead to a cycle of rising wages and prices, which can be difficult to break.

2. Sticky prices: Some prices, such as those for rent and utilities, are slow to adjust to changes in market conditions. This can lead to a situation where prices remain high even when demand is falling.

3. Expectations of inflation: If people expect inflation to be high, they may be more likely to demand higher wages and prices. This can create a self-fulfilling prophecy, where inflation becomes self-perpetuating.

Sticky inflation can have a number of negative consequences, including:

1. Reduced purchasing power: When prices rise, people have less money to buy goods and services. This can lead to a decline in living standards.

2. Increased uncertainty: Sticky inflation can make it difficult for businesses to plan for the future. This can lead to investment and job losses.

3. Increased social unrest: Sticky inflation can lead to social unrest, as people become frustrated with the rising cost of living.

There are a number of things that can be done to address sticky inflation, including:

1. Monetary policy: Central banks can use monetary policy to try to control inflation. This can involve raising interest rates to make it more expensive to borrow money, or selling government bonds to reduce the amount of money in circulation.

2. Fiscal policy: Governments can use fiscal policy to try to control inflation. This can involve raising taxes or cutting spending.

3. Structural reforms: Structural reforms can help to make the economy more flexible and responsive to changes in market conditions. This can help to reduce the likelihood of sticky inflation.

Sticky inflation is a complex issue, and there is no easy solution. However, by taking steps to address the underlying causes of sticky inflation, it is possible to reduce its negative consequences.