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Economy and Finance

Economy and Finance

What is SKEWFLATION? What causes skewflation?

28 Dec 2023 Zinkpot 476
  1. Skewflation is a phenomenon where there is a disproportionate increase in the prices of certain goods or sectors, while others may experience stable prices or even deflation. 
  2. This term was coined to describe a specific type of inflation that affects different sectors of the economy unevenly.
  3. It is a relatively new term in economics that was coined in the aftermath of the financial crisis of 2009-2011. 
  4. Skewflation is characterized by a price rise of one or a small group of commodities over a sustained period, along with decreasing prices in others. 
  5. For example, in India, skewflation was witnessed in 2009 and 2010 when food prices showed inflation, and the prices of non-food items were majorly stable. Another instance is the United States during the same period, where some commodities experienced inflation while others faced deflation or stable prices.
  6. Skewflation is not the same as stagflation, which refers to a situation where the economy experiences both inflation and deflation simultaneously. In contrast, skewflation focuses on the uneven distribution of inflation or deflation among different sectors of the economy.
  7. What causes Skewflation? It is caused by various factors, which can be broadly categorized into the following:
    • Changes in monetary policy: Skewflation can be caused by changes in monetary policy, which may lead to a rise in the prices of specific goods or sectors. For example, an increase in the money supply can stimulate demand for certain goods, causing their prices to rise.
    • Fiscal stimulus: Skewflation can also be influenced by fiscal stimulus measures, which can lead to a rise in the prices of specific goods or sectors. These measures, such as tax cuts or infrastructure spending, can boost demand for certain goods, causing their prices to increase.
    • Supply chain disruptions: Skewflation can occur when there are supply chain disruptions in specific sectors, leading to a rise in the prices of those goods while other sectors may experience stable prices or even deflation. For example, if a natural disaster affects the production of specific goods, their prices may increase due to supply constraints.
    • Government regulations and policies: Skewflation can be influenced by government regulations and policies that affect specific sectors or industries. For example, price controls on specific commodities can lead to skewflation if they cause supply constraints or distort market prices.
    • Technological advancements: Technological advancements can lead to skewflation by affecting the production costs and prices of specific goods or sectors. For example, innovations in technology can lead to lower production costs for some goods, causing their prices to decrease while other goods may experience price increases.
    • Global economic conditions: Skewflation can also be influenced by global economic conditions, such as international trade imbalances, exchange rates, and global commodity prices. For example, a rise in global food prices can lead to skewflation in countries that rely heavily on food imports.
  8. The impact of skewflation can be observed in various aspects of the economy and society, including consumer welfare, business performance, government policies, income inequality, economic growth, and investor sentiment. 
  9. It highlights the need for more targeted and nuanced policy responses to address sector-specific inflationary pressures and maintain economic stability.
     

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