- Inflation dynamics have shifted from primary supply shocks to second-round effects, where higher input costs and price expectations seep into broader core inflation and wages. - Central banks face tough trade-offs because traditional monetary tightening (raising interest rates) is less effective against structural supply-side pressures but necessary to anchor inflation expectations. - Managing second-round effects requires a delicate balance between fiscal measures (supply management) and monetary vigilance to prevent inflation from becoming entrenched. - **Second-Round Effects:** Secondary inflationary pressures that occur when initial supply shocks, such as food or fuel spikes, translate into generalized price and wage increases across the wider economy. - **Reserve Bank of India:** India's central banking institution, established under the RBI Act of 1934, responsible for regulating the monetary system, issuing currency, and maintaining price stability. - **Monetary Policy Committee:** A statutory body constituted under the RBI Act, 1934, tasked with determining the policy interest rate required to achieve the inflation target while supporting growth. **Introduction** The article discusses the challenge of inflation's second-round effects, where initial price shocks (such as food or fuel spikes) translate into generalized cost-and-price spirals, complicating central bank monetary policy responses and threatening macroeconomic stability. **Core Issue and Detailed Points** - Inflation dynamics have shifted from primary supply shocks to second-round effects, where higher input costs and price expectations seep into broader core inflation and wages. - Central banks face tough trade-offs because traditional monetary tightening (raising interest rates) is less effective against structural supply-side pressures but necessary to anchor inflation expectations. - Managing second-round effects requires a delicate balance between fiscal measures (supply management) and monetary vigilance to prevent inflation from becoming entrenched. **Key Statutory Bodies, Acts & Concepts** - **Second-Round Effects:** Secondary inflationary pressures that occur when initial supply shocks, such as food or fuel spikes, translate into generalized price and wage increases across the wider economy. - **Reserve Bank of India:** India's central banking institution, established under the RBI Act of 1934, responsible for regulating the monetary system, issuing currency, and maintaining price stability. - **Monetary Policy Committee:** A statutory body constituted under the RBI Act, 1934, tasked with determining the policy interest rate required to achieve the inflation target while supporting growth.