We have often heard our parents or grandparents saying that they used to manage the entire house for one hundred rupees a month in “those days.”
We usually smirk and say “Gone are those days. Today we cannot even have one full meal in one hundred rupees.”
Blame it on inflation. Inflation erodes the purchasing power of money such that Rs.100/- today is no longer Rs.100/- tomorrow.
We understand inflation, but what does imported inflation mean?
When the general price level rises in a country because of the rise in prices of imported commodities, inflation is termed as imported.
No country in the world is self-sufficient by itself.
Each country depends on other countries for goods and services which are not produced domestically.
For Instance, India imports about three quarters of its total crude oil consumption.
Therefore, if oil prices go up in the international market, inflation in India will also go up due to higher prices of the petroleum products.
However, it is not necessary that only rise in the price of a traded commodity in the international market fuels imported inflation.
Inflation may also rise because of depreciation of the domestic currency.
For example, if the rupee depreciates by 15% against the US dollar in a particular period, the landed rupee cost of oil will also go up by a similar proportion and will affect the price and inflation numbers.
Let us consider an example. Suppose we import Petrol at $100 a unit. And the exchange rate is Rs.85/- per dollar. This means we need Rs.8,500/- to first buy $100, and then pay for the Petrol purchase of one unit.
Therefore, the price of Petrol depends on two factors:
- Price of Petrol (in dollar terms)
- Price of the dollar
As explained above, price of petrol in India is directly proportional to the price of petrol in dollars, but also is impacted by the price of the dollar.
Let us understand how.
Suppose the price of the dollar goes up to Rs.100/- per dollar. This means that we will have to cough up Rs.10,000/- to buy $100 for the purchase of one unit of Petrol.
So, even though the price of Petrol continues to be stable in the international market at $100, the price of Petrol in India goes up from Rs.8,500/- per unit to Rs.10,000/- per unit. So, while there is 0% increase in the price of petrol in the international market, the price of petrol in India increases by approx. 11.76%.
Therefore, one often reads that the devaluation of the rupee will bring in imported inflation.