Question

1.5 Explain why inflation has dipped so low during the Covid 19 period
(2x2​

Answer 1

Answer:

The probability of inflation returning in the next two to three years has increased significantly for three main reasons.

Firstly, the current aggressive global monetary and fiscal easing is unprecedented and is likely to create inflationary pressures sooner rather than later. Money printing by central banks is sky-rocketing, leading to a record surge in money supply globally.

Secondly, the supply shocks from the US-China trade war last year have now been exacerbated by Covid-19 lockdowns – meaning less globalisation or even deglobalisation – which is likely to be inflationary.

Thirdly, after a protracted bear market in commodities, and a collapse in oil prices, significant supply destruction is underway. Any signs of normalisation in demand would increase commodity prices from their current historically depressed levels.

Answer 2

Dipping of Inflation

COVID‑19 is an infectious disease. It was first identified in December 2019 in Wuhan, Hubei, China. It has taken a lot of lives around the world. And yet it is killing a lot now and getting stronger than before. Doctors are trying their best to discover the vaccine. Now we are suffering for Covid 19 for many reasons. To maintain social distance Government declares lockdown not only in India but also all over the world. We are now at home. So directly and indirectly, inflation has dipped low during the Covid 19 period. And society depends on economy.

The main reasons for the decline in inflation:

• (1) Firms have unsold goods. Because of Covid 19 everything (factories & farms) is closed indefinitely. So they are producing nothing but necessary. And commodity prices are getting worse. So the money transactions are getting less.

• (2) Wage growth is low. There are lot of unemployment and more competition for job vacancies. So money is not earning and rolling.

• (3) Inflation is declining due to lowe transportation facilities. Because due to lockdown airport and rail services are closed.

• (4) There is less confidence in business. It's clear that there is a great chance of loss.