The A-to-Z of growth and inflation: 26 key terms you must know

Base effect: Since the inflation rate is arrived at by computing the percentage change, it is influenced by the denominator – or the base. If the index rose very sharply from April 2021 to May 2021, it may lead to inflation easing in May 2022 even if prices are higher than in April 2022. This is a favourable base effect.

Core inflation: This measures inflation after excluding items whose prices are volatile – food and fuel, for instance. This measure of inflation is more stable than the headline number and is seen as an indicator of underlying demand.

Depression: A fall in GDP for multiple years is termed a depression. A recession is commonly defined as at least two consecutive quarters of a year-on-year contraction in GDP – such as the one India experienced in the second and third quarters of 2020 following the imposition of a nationwide lockdown.

Expectations: Anchoring the expectations of consumers and businesses on future inflation is key to ensuring price stability. Persistence of high inflation leads people to expect a faster rise in prices, which can be self-fulfilling; to pre-empt a rise in prices, consumers can bring forward their purchases, which then leads to higher prices because of increased demand. See this interview for a more detailed discussion on inflation expectations.

Failure: This takes place when inflation is outside the RBI's 2-6 percent tolerance range for three consecutive quarters. In this event, the RBI must explain to the government the reasons for the failure, the remedial actions proposed, and an estimate of when inflation will return to the target range.

Generalised inflation: This is when the increase in prices of a category of items – say fuel – leads to prices of other items also rising. For instance, higher fuel prices increase the cost of transporting food. This higher transportation cost can be recouped by increasing the price of food items, resulting in generalisation of inflation.

Hyperinflation: This refers to a period of extremely high and increasing inflation. The most striking example is 1920s Germany, with inflation rising to almost 30,000 percent in late 1923 as prices doubled almost every four days. More recently, Zimbabwe has reported eye-watering levels of inflation, with the figure for May coming in at 131.7 percent.

(shr)Inkflation: A little bit of cheating, perhaps, just like this term. Shrinkflation refers to the phenomenon of companies maintaining the price of their goods but reducing the quantity offered. So a packet of crisps continues to cost Rs 20, but now weighs 52 grams instead of 60 grams. Companies do this to avoid raising prices, which may weaken demand further and lead to loss of market share. This usually occurs when rising input costs put pressure on companies' margins.

Jerome Powell: Powell is the chair of the US Federal Reserve System, the country's central bank. With the US experiencing the highest levels of inflation in 40 years, the speed with which Powell and his fellow rate-setters increase interest rates will have implications for the rest of the world.

K-shaped recovery: This is what economists say India is currently experiencing, with different sections of the economy recovering at varying rates. For instance, the rich may have become richer following the pandemic as they could work from home. Meanwhile, the poor may have been rendered unemployed by the pandemic, depending on their jobs. Naturally, how these two sections emerge from the pandemic will be wildly different.

Liquidity surplus/deficit: The level of money available in the banking system. During an economic crisis, central banks provide extra liquidity, as the RBI and other central banks have done during the pandemic. However, excess liquidity can lead to higher inflation as greater sums of money chase the same number of goods.

Monetary Policy Report: This is a report the RBI is legally mandated to release every six months. The report, published in April and late September or early October every year, must detail the sources of inflation and inflation forecasts for the next 6-18 months.

Nominal growth: GDP growth recorded without adjusting for inflation. As such, periods of high inflation will see high nominal growth. India's real GDP growth was 8.7 percent in FY22. But the high rate of inflation meant nominal growth was 19.5 percent.

Output gap: The difference between how much an economy is currently producing and what it can potentially produce. If the output gap is negative, there is said to be spare capacity in the economy and a rise in demand will not necessarily lead to higher inflation. There is no precise measurement of output gap and it is usually derived from surveys.

Price momentum: The month-on-month change in prices. Price momentum is positive when prices rise from one month to another, and vice versa. A change in the inflation rate from one month to another can be broken up into the price momentum and the base effect.

Quarterly projection model: The RBI's system of forecasting inflation and growth, which informs monetary policy decisions. The model was updated in early 2021 to take into account the data up to the last quarter of 2019.

Real policy rate: The policy rate adjusted for inflation. There are many ways to measure it – the current repo rate minus the prevailing inflation rate; the current repo rate minus one-year-ahead inflation forecast; or the current interest rate on one-year Treasury bills minus one-year-ahead inflation forecast. The RBI has used all three definitions at one point or another over the past eight years. The most acceptable seems to be the second one.

Stagflation: A combination of stagnation and inflation, it refers to a period of low growth and high inflation. A classic example of stagflation is the 1970s. The World Bank has drawn comparisons between the current situation and the 1970s, citing the prolonged period of highly accommodative monetary policy in major advanced economies followed by persistent supply-side disturbances pushing inflation higher.

Terminal rate: The level of policy rate consistent with stable inflation and full capacity utilisation. This level of policy rate is not fixed and can vary over time. Economists say the terminal repo rate for India may be 6-6.5 percent currently, suggesting a series of rate hikes in the coming months.

Urjit Patel committee: The panel responsible for laying down India's current monetary policy framework. Led by former RBI governor Urjit Patel, the committee submitted its report (PDF, external link) in January 2014.

V-shaped recovery: This represents a near-instantaneous recovery from a rapid decline. It was thought India's recovery from the pandemic would be V-shaped. Instead, it has been K-shaped.

Wage-price spiral: This is the feedback loop that describes the impact of a rise in wages or prices on the other. For instance, higher wages lead to increased demand, which results in higher prices. This can lead to demand for higher wages to make up for a fall in real income.

(e)Xchange rate pass-through: Some more cheating, but it's X! The exchange rate pass-through describes the extent to which domestic prices change due to exchange rate movements. According to a recent paper co-authored by RBI deputy governor Michael Patra, India's exchange rate pass-through has fallen from 15 percent to 8 percent, meaning a 1 percent change in the rupee-dollar exchange rate results in an 8-basis-point change in inflation.

Yield curve: This is the line joining the yield-to-maturity for a category of securities – say government bonds – of various maturities. Securities maturing at a later date usually have a higher yield, and so the yield curve normally is upward sloping. During the pandemic, the RBI looked to exercise control over how the yield curve behaves, calling it a public good. The government's yield curve is important because it provides cues to securities of other issuers.

Zombification: This describes the support offered to unviable companies by way of continued lending. If a sufficiently large number of companies become zombies, the economy as a whole can become less productive because of poor credit allocation.