Inflation is on the radar screen!

 As the global economic situation stands now, the facts and circumstances cannot be termed as a smooth one. It is a fact that of late the global rebound picked up a bit of steam - in advanced economies. Though activity has moderated [less than expected], yet growth remains subdued, unemployment is still high, and renewed stress in the euro area periphery are contributing to downside risks. British economy is also facing many problems. Growth in many countries, globally, is either a bit anemic to negative.

Side by side-in some emerging economies, activity remains a bit buoyant, but inflation [a rise in the general level of prices of goods and services in an economy over a period] pressures are emerging and there are now some signs of overheating. But the global economy could be in jeopardy unless wealthy countries show more resolve in attacking debt problems and ‘emerging powerhouses keep their simmering economies from boiling over’, the International Monetary Fund warned, sometime back.

As a whole inflation has become a serious issue in several emerging markets, requiring policy makers to try to slow the flow of capital rushing into their economies – steps that could sharply curb growth and demand for commodities if they are not implemented carefully. In addition, many countries’ freelance experiments with capital controls have included efforts to keep their currencies from further appreciating, reinforcing an obstacle in the way of a balanced global economy. Very correctly, ‘downside risks to the recovery remain elevated,’ as the IMF observed, sometimes back, points to the need for financial reform in advanced economies, action on euro zone, and policies to keep inflation in check in key emerging economies. Undoubtedly, the ongoing situation -has been worrying everyone.

India’s retail inflation breached RBI’s tolerance limit in January, 2023 and accelerates to 6.52 per cent. January’s 6.52 per cent rise on an annual basis as against 5.72 per cent in December last year - much higher than expected - had been partly fuelled by rising food prices, which accounted for nearly 40 per cent of the Consumer Price Index (CPI) basket. Inflation in the cereals category itself hit 16.12 per cent in January compared to 13.79 per cent in December, according to latest available data. Alongside cereals, rising prices of protein items [like milk, eggs, and meat] pushed up food and beverages inflation to 6.2 per cent in January up from 4.6 per cent a month ago.

What is more, now the position reflects that production of fruits and vegetables in the country may fall by around 30 per cent this season as farmers report damages to their crop due to high temperatures amid the ongoing flowering and fruiting process. Mango farmers have been predicting that massive flower and fruit drop, arising out of the sudden and early onset of summer, will also adversely affect lychee, citrus fruits, watermelons, bananas, and cashew crops. Vegetables like cabbage, cauliflowers, leafy vegetables and tomato – not only will the size decrease, but also the nutrient content!

Not only India, but other developing economies in Asia are also facing the inflation challenge. Moody’s point out that inflation in Pakistan could average as high as 33 per cent in H1 2023.

Alarm bells have started ringing in various markets. Many companies are in fact nervous about a probable economic slowdown – retrenchments go on!!

No Respite Very Soon?

Already fears of inflation [the state of rising prices, not high prices, referring to the increase in prices for a basket of goods and services expressed on a yearly basis]are mounting in several countries, raising the prospect of higher interest rates in regions that can ill afford them in this stage of recovery. This is not a trend that will reverse anytime soon!

For India the RBI forecast is already here - retail inflation for FY23 at 6.5 per cent and for Q4 at 5.7 per cent. Retail inflation for FY24 has been forecast at 5.3 per cent with Q1 at 5 per cent, while that for Q2 would be at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent.

If the current trends are of any indication the rising food costs show and indicate inflation would hardly rebound in coming months. Though from some quarters the suggestion is there that more toughness is to be there, yet too much tightness could well hurt the growth rate. A decline in inflationary pressure, as per ongoing facts and circumstances, could, at best, be temporary.

No doubt, economies like India have already acted, but some other economies are showing signs of stress as well. Rightly, the then European Central Bank chief Jean-Claude Trichet issued a call to more arms among monetary authorities around the world. Accordingly “….all central banks, in periods like this where you have inflationary threats that are coming from commodities; have to be very careful that there are no second-round effects on domestic prices”.

Back home, it has been a fact that India after independence has had a more stable record with respect to inflation than most other developing countries. Since 1950, the inflation in Indian economy has been in single digits for most of the years - between 1950-1960 inflation on an average was at 2.00 per cent; while between 1960-1970 it was on an average at 7.2 per cent and then between 1970-1980 it hovered at around 8.5 per cent. Subsequent trends are already well known.

Whatever be the experienced efficacy / strength of the weapons – tinkering around well-known laid down formulae - cautiously avoiding the open secret [existence of black money paving the path for rising parallel economy] - it is clear that the outlook doesn’t suggest a pullback anytime soon.

It is clear that in today’s complex global economic situations, inflation is caused not by one factor- rather results in due to interplay of a number of economic factors: (a) when the governments of country print money in excess, prices increase to keep up with the increase in currency; (b) increase in production and labor costs, have a direct impact on the price of the final product, resulting in inflation (c) when countries borrow money, they have to cope with the interest burden, which, in turn, results in inflation; (d) high taxes on consumer products, (e) demands pull inflation, wherein the economy demands more goods and services than what is produced (f) cost push inflation or supply shock inflation, wherein non-availability of a commodity would lead to increase in prices.

So what is the Central Bank to do? The foremost question is whether raising rates would tame inflation. It may not, if one considers that some degree of inflation is imported. The regulator can do a little to prevent the prices for imported food and fuel from rising! For example: it also has to be a factor in the possible effects of the rise in the tax - hike could bring in a one-off event that probably skews the inflation figures.

It is better not forgotten that necessary shifts in demand around the globe are happening steadily, as are efforts to bolster banks’ abilities to withstand economic shocks. Added to these -the ongoing Russia-Ukraine war, with no end in sight, has been disturbing all other countries as well. The negative effects are already there!!

Obvious enough, the cyclical fluctuations are to be tackled through more global, cooperation and interactions. We have to remember that the mortgage crisis of 2007 in USA best illustrated the ill effects of inflation - housing prices increases substantially from 2002 onwards, resulting in a dramatic decrease in demand! Let it not get repeated!