This creates a pressure on firms’ costs and they may in turn increase prices to maintain their profits. Independently, the producers’ own inflation expectations also affect inflation directly by influencing their pricing behaviour. If companies expect general inflation to be higher in the future, they may believe that they can increase their prices without suffering a drop in demand for their output.
Fourth, there has also been added stimulus from the crisis driven fiscal and monetary policy. Fiscal consolidation process was reversed in 2008–09 which impacted the macroeconomic conditions (Chart 2). Higher fiscal expansion also impedes efficacy of monetary policy transmission. The moderation in private demand resulting from anti-inflationary monetary policy stance is partly offset by the fiscal expansion.