THE political crisis of the current government -- originating out of a legitimacy deficit due to the exposure of the hijacking of the electoral process through its cronies -- is likely to be followed by a simmering economic crisis. The fact that the cost of living is going to rise in the coming days has also been indicated by the people in power. The central government, while facing numerous challenges to retaining power with its authority being deeply eroded, seems to be ringing the alarm bell of potential inflationary pressures. Hence, rising unemployment would be accompanied by spikes in prices. The tightening of the belt requires no intimation as the recent RBI household survey of inflation expectations signals 10 per cent rise in prices. This would largely be driven by rising energy prices, particularly diesel that impacts transport cost as most goods are transported by road.

On the other hand, the US government has passed a law that it can impose 100 per cent tariffs on countries that buy oil from Russia. Besides India, there are many European countries that import natural gas from Russia, and it is not because of Indian imports that Russia is able to finance the war against Ukraine. However, the arm twisting of the US continues although India’s leaders mistakenly thought they could convert conflicts into economic friendship through personal relations. The US establishment also restricted imports from Indian software and IT companies arguing that such trade takes away jobs from US citizens. In the recent past, despite widening gaps in merchandise trade, India could manage to restrain the trade deficit only because of exports in services. Since this is highly dependent on exports to the US, controlling trade deficits would be difficult in the face of US pressure.

INFLATION EXPECTATIONS

The forecast on inflation at the global level is based on several factors. Recent attacks on oil infrastructure in Russia by Ukraine are likely to disrupt supplies and raise prices of diesel. The US, though it threatens to impose sanctions on other countries for importing oil from Russia, at the same time cautions Ukraine to stop attacking oil bases in Russia because the US imports diesel and supply disruptions caused a rise in diesel prices. American farmers are unhappy about the increase in diesel prices as it pushes up the cost of production in agriculture. Political turmoil in the Persian Gulf, aggression on Iran by the US, the geopolitical crisis related to the Strait of Hormuz and related disruptions in imports of fertilisers and natural gas are likely to generate inflationary pressures soon. The rise in energy and fertiliser prices is likely to push up food inflation through its impact on transportation costs. The cost of living would rise causing further contraction in effective demand.

The IMF’s World Economic Outlook of October 2026 also notes that expectations of high returns on AI have contributed to huge investments in semiconductors, data centres, cloud infrastructure, electricity generation, grid connections and cooling systems. This has created demand for capital goods, construction services, land, energy, and skilled labour before any broad productivity gains have materialised. This also creates inflation for economies that are operating near capacity. Although energy flows were re-rerouted due to conflict in the Strait of Hormuz, the escalations of tension in the Red Sea and Black Sea contribute to rise in energy prices. True that investments with high expectations of profit, reducing energy intensity of output and rerouting of energy flows through diversifying trade have resulted in greater resilience in the global economy but AI infrastructure is also highly energy intensive and energy price rise spills over the economy through the technology route as well. The devastations of war, rising military expenditure, supply disruptions and energy prices have also increased private and public debt which pushes up interest rates. Rising interest rates in the advanced economies are transmitted to the developing economies through conservative monetary policies primarily aimed at inflation targeting and this once again restricts effective demand in an economy already operating below capacity.

Global headline inflation is expected to be 4.7 per cent in 2026 largely driven by energy and food prices. In the medium term, the WEO report identifies other factors that may adversely impact the inflation scenario. For instance, if the conflicts persist between Ukraine and Russia and in the Persian Gulf, energy prices would not only increase soon but will have a longer term impact. Till now, spot prices are higher than future delivery prices indicating that the expectations of conflict are still considered to be temporary but if conflicts persist for long, there would be long term upward revision in oil prices. The vulnerability in natural gas due to low inventory according to European norms is also going to put pressure on prices when demand for gas increases nearing winter.

The report also expresses concern that geopolitical conflicts may also inflict cyberattacks on the digital and common technology infrastructure that may cause disruption in the financial market as well. Also, extreme weather events such as flood, prolonged drought and water stress exacerbated by the ongoing El Nino episode might have adverse impact on commodity prices, transport systems and fertiliser demand. In the case of India, the RBI’s inflation expectation survey reflects a similar trend. According to the latest report of September 2026, households’ median inflation expectations, for the next three months and one year, rose by 70 basis points and 60 basis points to 9.9 per cent and 10.0 per cent respectively. As high as 81.9 per cent of respondents expect that there will be a general increase in prices while 84.9 per cent and 79.4 per cent anticipate a rise in food prices and non-food prices respectively.

UNEQUAL BURDEN

The projection of inflation both due to global and domestic factors may lead to a cost-of-living crisis. Cost of living crisis primarily indicates a higher growth of prices of necessities such as food, housing and fuel compared to price increase of other commodities as well as higher than the growth of nominal wage. If the prices of necessities increases, it adversely impacts the poor because of the combined effect of two features. First, the demand for necessities is highly inelastic meaning that it is difficult to dispense with such demand. Second, for the poor, the share of these commodities in the consumption basket is much larger compared than for the rich. This results in substantial difference in impact of inflation between rich and poor households or inflation inequality rises during the cost-of-living crisis. It is also important that because of rise in prices of necessities the people marginally above the poverty line may once again slip below the poverty line.

In the case of developing countries, there is another structural factor in the labour market that creates an unequal effect of inflation on working people. When the prices of inputs increase, the producers who are the employer class try to pass on the entire price rise to consumers by increasing the price of final products. Anticipating such a move, workers may demand higher wages to at least partially offset the adverse effects of the price rise. Whether they would be successful or not depends on the bargaining power of the working people vis-à-vis their employers. It also requires an institutional structure of collective bargaining that allow such negotiations to happen. Only a small share of the workers in the organised sector of manufacturing and services sector and a small minority of white-collar employees could retain some protection from adverse price fluctuations through dearness allowances. Most workers are completely denied of any such institutional protection. In other words, a large section of the workforce devoid of any institutional protection is going to bear the brunt of rising prices disproportionately and would be left with lower real incomes. On the other hand, neoliberal monetary policies intended to target inflation respond by raising interest rates that adversely affect domestic demand and hence employment while creating higher returns for the financiers.