Second-round effects
Also called: Pass-through of inflation · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
Second-round effects happen when a price rise that started in one place spreads to other prices and to wages. The first rise is usually in food or fuel. That rise is the first round. In the second round, firms pass their higher input costs on to their own customers. Workers who expect prices to keep rising ask for higher wages. Together these push up prices for services and for the economy as a whole. Central banks like the RBI watch for second-round effects closely. A one-off food spike often fades by itself, but once the rise has spread, it tends to last and is harder to bring down. It can turn into a wage-price spiral, where higher prices lead to higher wages, which lead to higher prices again.
Example
In October 2026, India's headline CPI inflation was 6.1%. Food and beverages rose 8.5% and transport rose 5.8%. Restaurants and accommodation rose 10.1%, the first double-digit reading in the new base-2024 series. Restaurants buy food and fuel, so when those costs rose, restaurant and hotel prices rose too. That is a second-round effect.
Don't confuse with
- First-round (direct) effect: the shock's own direct effect on the index. For example, higher vegetable prices push up the CPI food group straight away. Second-round effects are the indirect spread that comes after, into other items and into wages.
- Core inflation: this is a measure. It is inflation with volatile food and fuel taken out. Second-round effects are a process. They are one of the main reasons core inflation starts to rise after a food or fuel shock.