Inflation Taming Requires Both Monetary Intervention & Fiscal Action

INFLATION IS GALLOPING. Food and vegetable prices are up 12 per cent and still climbing Clothing and footwear prices are up by nine per cent. Most poor are in distress. The rich too are beginning to ‘notice’ the rising prices. The political system is equally concerned and can no longer remain indifferent and aloof.

- Vikas Singh

Inflation is an outcome of several ‘knowns’, but equally some ‘unknowns’. The collinearity between events that trigger inflation and outcomes as a result of those events is often dodgy, mostly indeterminate. The economic phase and cycle, and the accompanying economic activities play a far bigger role than imagined or acknowledged.

A ‘little’ inflation is acceptable, beneficial & not detrimental to growth

Central bankers must embrace the idea that for a growth economy like ours a ‘little more than a little’ inflation may not be a bad thing. The pandemic induced lockdown halted economic activities. It disrupted the supply chain, triggered higher input costs that translated into soaring consumer prices. India will import inflation due to the rising cost of raw materials. The Russia-Ukraine conflict has escalated the pain.

While inflation has been supply-led, one cannot ignore the role of demand. The lockdown was particularly harsh on the smaller firms that lubricate the economic wheel, create jobs and drive consumption. The Indian economy has a rapid (fuelled by fiscal and monetary stimulus), but equally lumpy and craggy recovery. The nature of recovery has adversely influenced key economic drivers.

Inflation is transitory. Will rise, before it ebbs. Taming will need some doing

Taming inflation will require both monetary ‘intervention’ to cool the heating economy, as well as fiscal measures to ease the supply constraint and reduce cost.