The Economic Policymakers Will Face Inflation Challenges in the Days Ahead!

  • By all indications, the pandemic-induced restrictions on economic activities appear to be tapering off over the last few months largely due to easing of stringent constraints as also several sectors picking up the pace on the back of confirmed Covid infection rates coming down steadily. The economic packages announced by the Union Government have also had a marginal effect, if not substantial, in energizing the activities. Most welcomingly, some of the sectors have already started scaling up to the pre-pandemic levels showing the general positive tendency prevailing across the country.

PC: vectorjuice

  • However, there are also indicators that inflation is going to be a spanner in the wheels of the Government’s efforts to sustain the momentum of economic activities. As you are aware, inflation as a global phenomenon last made headlines in the 1970s. There are growing signs that we may have to re-run soon but with a palpable difference that may not be easy to comprehend. Nonetheless, the underlying causes are different and there is a school of thought among central bankers, the custodians of the monetary policies, that we are in uncharted waters. One way to get a grip on the issue is to look at what three prominent central banks viz., US Federal Reserve, Bank of England, and the Reserve Bank of India have been acting on the matter recently.
  • It is worthwhile to note that none of these economies have crossed the threshold of full economic recovery from the pandemic, but their central banks have either overtly or subtly shifted positions. People following closely would know that BoE last week became the first major central bank to increase its policy interest rate to combat inflation. Given an inflation target of 2%, BoE had to contend with a two-percentage-point increase over just two months in UK’s inflation, which was 5.1 % in November. During the same month, the US inflation reading was 6.8 %, a 39-year high. Further, the Fed’s Chairman indicated in a recent US Congressional testimony that they would stop classifying higher inflation as transitory.

PC: macrovector

  • Here in India, the Wholesale Price Index in November was 14.23%, a 12-year high. Mind you, the underlying cause this time is pressure from both the demand and supply sides. Delving further would reveal that soon after economies began normalization, not only did supply disruptions push up price levels of manufactured products but also the compressed pace of transition to a digital structure worsened matters in products such as semiconductors. Also, India cannot insulate itself from global developments as supply chains are import-dependent for inputs. As such, RBI’s job in the coming year will get trickier as we have not recorded a durable recovery from the Covid-induced shock yet.
  • The challenges going forward will be the spillovers of changes brought about by the US Fed, in particular. Make no mistake, some effects will be transmitted through the foreign exchange and debt markets leading to changes in RBI’s policy rate at a time that is out of sync with popular market expectations. Challenging times are ahead for economic policymakers in the coming days.