A peculiarity of American English is that “momentarily” means in an instant rather than a short time. Last year, the US Federal Reserve made frequent use of “transient” in its discussion of inflationary pressures on the US economy, ranging from shortages of semiconductor chips to supply disruptions because there were fewer workers in US ports and in shipping lines. There were very few containers, perhaps even some linguistic confusion arose. In December, US inflation rose 7%, a four-decade high, even as core inflation (excluding fuel and food) rose to 5.5%.
Late last year, Fed Chairman Jerome Powell promised to stop using the term provisional. It was an acknowledgment that the Fed was looking at inflation through Metaverse-tinted glasses. In the real world, companies were passing on higher prices for their inputs and labor. Economists such as Lawrence Summers warned that the combination of a third major stimulus in the US and a massive infusion of liquidity by the Fed would drive inflation to a level the US had not seen in decades. The stock market crash last week was because Powell has now made it clear that he will not be constrained by the gradual increase in interest rates as his predecessors Alan Greenspan and Janet Yellen were. The market is expecting seven rate hikes this year and even a 0.5% hike in a jiffy.
This has implications for India and other developing countries as the US rate is an important benchmark. But, it also matters because inflation in India is sticky, despite being held hostage to the global rise in fuel and food prices. A massive increase in capital expenditure by the government on highways, railways and urban infrastructure set in Tuesday’s budget may or may not sufficiently revive hitherto weak investment by the private sector, but it did not prompt bond yields to rise to 6.85%. Motivated because government borrowing will increase. Interest payments now account for about a quarter of government spending and are actually driving down spending on food subsidies, health care and education. (Imagine managing a household budget this way, despite the multiplier effect of better highways.) It was made worse with no announcement of changes that would pave the way for India’s inclusion in global bond indices Will go As Anant Narayan of the Observatory Group puts it, “higher than expected central and state fiscal deficits and the absence of any tax changes to facilitate inclusion of India’s debt in the global bond index have rocked domestic bond markets. “
All is not calm either on the western or eastern trade fronts. Supply-chain distortions are driving up prices globally for everything from factory supplies to Swiss watches. Last week, the White House warned that US factories had only five days of inventory against a 40-day buffer for critical chips. A tall story in Mint on Tuesday observed that mustard oil prices were up 67% in January compared to 2020, while milk was up 15%. Vegetable prices have been fluctuating in recent months. Like the Fed, the Reserve Bank of India’s acceptance on interest rates suggested that it believed inflation was “temporary”. Perhaps it was making up for the absence of a meaningful fiscal stimulus.
Indeed, against the backdrop of one of the lowest labor participation rates in the world, New Delhi’s reduction of outlays for make-work programs and its calculations that the urban poor do not need help during a pandemic that has hit them disproportionately Yes, continues to bother. Our high vaccination rate, which is now over 75% of the country’s adult population, is a huge achievement that India must capitalize on.
To take just one example: tourism accounted for 10% of global employment pre-pandemic, but our restrictions on visas for foreign travelers and week-long quarantines for visitors from overseas who manage to come here have been removed. Given policy is an example. rearview mirror.
O’Micron, as the South African experience telegraphed several weeks ago, turned out to be just a bout of the flu for most of us. When the governments of Karnataka and Delhi announced lockdowns over the weekend in early January in response to rising cases of Covid infections, I asked a restaurant manager in Bengaluru what their last two years were. “We’re broken,” he replied poignantly, his face raised with concern.
In contrast, the Biden administration determined to drive the US economy red-hot to raise the incomes of low-wage workers, a new deal for the 21st century. It was the Fed’s fault for allowing interest rates to remain well below the US inflation rate for so long. Now inflationary expectations have hardened, and slashing prices is like slowing down a pinball machine. It’s not just semiconductors and steak that cost more in America; Prices are rising by more than 2%, accounting for more than two-thirds of the price indicators used to calculate inflation. Former New York Fed Chairman William Dudley has predicted that US short-term rates could reach 3% or 4% in the coming years. Fed officials have often suggested that rates may eventually settle at around 0.5% in real terms. But, as Wall Street Journal columnist Greg Ipp warned last week, “It’s been a long time since markets had to grapple with the Fed behind the curve. It’s got unpleasant surprises, more market volatility and higher bond yields.” Or as a low stock-market valuation is a recipe for a risk premium.”
As US interest rates rise, rise and rise, the suffering the US, India and others bear is likely to be the exact opposite of a fleeting one.
Rahul Jacob is a Mint columnist and a former foreign correspondent for the Financial Times.
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