From geopolitical tensions to food production hit by climate change, here are factors behind inflation

For those buying weekly groceries, paying regular visits to the market or driving to work on a daily basis, a consistent price rise is visible in the monthly household expenses. Almost everything from food to clothes is getting costlier at an accelerated rate, and the word inflation is appearing a lot in headlines. The phenomenon which can be summed up as a rise in prices over a specific time period has hit countries across the world, and a recession seems like the inevitable price to be paid for controlling it.

A consequence of the post-pandemic buying frenzy

The technical, jargon-heavy definition for inflation is that it is the change in wholesale price index (WPI) during a month, as compared to the same period in the previous year. The WPI is the rate of products traded in bulk, before they are sold to consumers at a retail price. An imbalance in the demand and supply of goods as well as the availability of cash among consumers is also a factor behind inflation.

After the pandemic, consumer spending went up as pent up demand from the lockdown finally found an outlet. This may seem like a good thing at face value, but due to supply chain disruptions and other factors, there just wasn’t enough to fulfill the public’s appetite. Global food prices were further affected due to geopolitical uncertainty triggered by the war in Ukraine.

Unpredictable moves cause uncertainty in fuel prices

Crude oil prices fell to a seven month low and the RBI expects them to be $100 a barrel in the second half of this fiscal year. India has been able to control inflation in fuel prices thanks to discounted oil coming from Russia, and even cheaper than that from Iraq. But now that OPEC has cut its ouput, global oil prices are expected to rise, which means fuel prices might go up in India.

The rupee has been in a free fall, and this makes it additionally difficult for India which relies on imports to fulfill 85 per cent of its fuel demand. Recently India also had to pay double for LNG, after gas shipments from Russia's Gazprom were diverted to Europe for winter.

The omnipresent threat of climate change

To add to all those factors, climate change is also playing its part in worsening inflation woes for India. Sowing for paddy, rice, and for oil seeds has been low, while an extended monsoon with spells of heavy rains across the country has hit production of vegetables such as tomatoes. Reports by International Food Policy Research have already predicted that food production will be down by 16 per cent and hunger will be up 23 per cent due to climate change by 2030. This just makes the ongoing price rise in India even worse.

What’s the way forward?

The only way forward to bring inflation under control is to restrict cash flow, that will bring down consumer spending, demand and prices along with it. For that the US Federal Reserve, and central banks across the globe are hiking interest rates, which will increase the cost of borrowing. But while that does control liquidity, it also puts the brakes on business expansion and industrial development, that can hit the economy as well as jobs, and that means an inevitable global recession.

With inflation and recession to choose between, the world is caught between a rock and a hard place, which means that an economic downturn is on the horizon for at least another year.