Imported Inflation

The Asian Development Bank recently warned that India could face imported ination as the rupee could depreciate amid the rise in interest rates in the West.

• Imported inflation refers to the rise in the prices of goods and services in a country that is 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, thus boosting inflation.
• 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, which in turn means that they will effectively be paying more for anything that they import.
• A rise in interest rates in the West tends to cause the currencies of developing countries to depreciate against western currencies, which in turns can lead to higher import costs for these countries.
• A rise in import costs even without depreciation in the value of a country’s currency is also believed to lead to import inflation.