List of Contents
News: Recently, the International Monetary Fund published statistics on actual inflation rates and growth rates in the world in economy group-wise which also include corresponding figures for India, for the period 2015-2019, 2020, 2021 and projections for 2022.
What are the findings?
The global economy is confronted with a daunting prospect, as accelerating inflation and decelerating growth.
In advanced economies, consumer price inflation which was a mere 1% per annum during 2015-20 is projected to reach about 6% in 2022. These projected inflation levels in rich countries, for 2022, are unprecedented and have not been witnessed since the oil crises of the 1970s fifty years ago.
In developing economies, where consumer price inflation was on average 5% per annum during 2015-2020 is projected to reach about 9% in 2022. For Latin America, Sub-Saharan Africa, and Middle East & Central Asia, the inflation reached double-digit levels in 2021 (Except Asia where inflation is moderate).
In Developing Europe (non-EU transition economies), the corresponding rates are 10% and 27% per annum for 2021 and 2022.
What are the factors underlying inflation?
After the financial crisis of 2008, the global growth had not returned to its boom levels seen until 2008. The recovery was slow and uneven. There was a sharp contraction in output and employment everywhere during the pandemic period.
In response to covid-19 pandemic and associated lockdown during 2020-2021, most central banks adopted easy monetary policies while governments adopted expansionary fiscal policies. Thereafter, significant proportions of cheap money went into financial assets. This led to stock market booms while there was an economic slump. This led to crashing prices of primary commodities.
The Russia-Ukraine war has accentuated inflation. This has led to contraction in world supplies of fuels (oil and gas from Russia) and food (wheat from Ukraine), while the sanctions and the war disrupted supply chains.
In addition, there is a sharp slowdown in growth worldwide. The slowdown is being experienced by advanced economies, and the developing economies.
The consequences of such high inflation and dampened growth are bound to be hurt poorer people and countries far more
What are the macroeconomic policy responses worldwide?
In response to high inflation, the orthodox macroeconomic policies (monetary policy and fiscal policy) are being adopted across the world. The worldwide central banks are hiking interest rates while the governments are working upon the fiscal consolidation to restrain and manage inflation.
What are the issues in the adopted macroeconomic policies?
The contractionary macroeconomic policies might accentuate rather than solve the problem of inflation. This is because the present inflation is driven by supply-demand imbalances, particularly in fuels and food. The imbalances have been caused by war-induced disruptions.
The raising of interest rates will not curb such supply-side inflation. This might stifle growth further. The higher interest rates will dampen investment while fiscal consolidation will squeeze consumption expenditure, which are the main sources of aggregate domestic demand.
If the government policies do not strike a balance between managing inflation and stimulating growth, it would lead to stagflation.
Monetary policy should be used for stimulating investment, while fiscal policy should be used for stimulating consumption expenditure to revive growth.
The well-being of people should be the primary concern of governments. Further, the well-being of people and economic progress of countries requires stability with growth. Therefore, price stability and economic growth must not be posed as an either-or choice.
Source: The post is based on an article “An inflation focus that neglects growth could lead to stagflation” published in the Live Mint on 12th May 2022.