Dr B K Mukhopadhyay
(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)
The global economy has been, to a small extent, showing signs of economic recovery from the pandemic days. But no respite - Russian-Ukraine war has been damaging the process. What is more, as the situation stands now, higher inflation has been a concern for central banks across the globe.
The ongoing situation has been worrying everyone. India’s retail inflation breached RBI’s tolerance limit in January, 2023 and accelerated 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 - has been partly fuelled by rising food prices, which account 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.
Not only India, but also other developing economies in Asia are facing the inflation challenge. Moody’s point out that inflation in Pakistan could average as high as 33 per cent in H1 2023, Inflation 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? 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.
In fact, the actual situation has rather worsened over the last couple of years marked by poor harvest, natural disasters, among others. The second-round inflation effect (rising prices for goods and wages across the board) would pose a major threat to developing countries in particular. So far the ongoing global increase in prices of commodities is concerned, a number of factors have played their roles: (1) demand for food crops and edible oils rose due mainly to rise in income in the developing world — strong demand from the oil exporting countries as well as increased use of these crops/commodities in biofuels, with biofuels. accounting for 5 to 10 per cent of the global production of primary biofuel feedstocks; (2) food prices rose because of low output stocks; (c) higher cost of cultivation; and (d) rise in the price of metals due to increasing demand from emerging economies like China.
Inflation, as is already known to us, is termed as an increase in overall level of prices in the economy and the inflation rate refers to the percentage change in the price index from the preceding period. Stagflation, on the other hand, refers to a period of falling output and rising prices, whereas recession refers to a period of declining real incomes and rising employment. Depression is a case of severe recession.
Cyclical Fluctuations
Inflation is, thus, a situation of sustained increase in the general price level. Creeping inflation sometimes accelerates, while at the same time on some occasions decelerate as well. While creeping inflation has many causes, galloping inflation occurs only when the government prints an incredible amount of money. The fact also remains that low inflation does not necessarily lead to high inflation.
It is already a popular myth that during inflation the workers lose purchasing power (purchasing power of a given sum of money is the volume of goods and services that it will buy). It is, however, clear that the wages that the people earn are also prices (price being paid for the labour services). Real wage rate, in such a context, refers to the wage rate adjusted for inflation, which, in turn, indicates the volume of goods and services that money wages will buy. During the times of such inflation, people pay higher prices for the same quantities of goods and services they had paid before. So, more and more income is needed for just-maintaining the standard of living.
Again, inflation does not typically erode real wages, since increase in nominal wages is compensated for the rising prices. Inflation acts as a redistributor of income and wealth; as inflation does not proceed evenly, it redistributes income and wealth in arbitrary, unfair ways and, as such, systematically discriminates against people living on fixed incomes. It may favour the borrower at the expense of the lender (here, real interest rate comes into play, which refers to percentage increase in purchasing power that the borrower pays the lender in exchange for loan).
Though in these days of globalization the external factors cannot be fully insulated, yet avoidable areas must not be lost sight of, especially so far as the developing world is concerned. One clear example is food grains. In many cases it is better to concentrate on boosting indigenous production than to depend on others for various reasons. The prices do rule high (wheat, for instance) and imports would be costlier in view of the fact that global demand, stemming from population rise and other factors, would be higher as compared to supply. The fact remains that the inflation-created uncertainties may hamper long-term contracts that are made. The other cost of this sort of cyclical fluctuation is that inflation may impose real costs on shoppers whose information feedback about relative prices goes down. Also, in an open economy, the domestic prices of commodities depend on the very behaviour of their global process. The pass-through is found to be very often incomplete and, that too, it may get influenced by administrative and fiscal interventions.
Multiple factors do not spare
It is better not forgotten that food security remains at the top! The Food and Agriculture Organization (FAO), sometimes back, clearly indicated that despite record output, import costs would go up by around 35 per cent.
In fact, global prices these days have more pronounced impact on domestic prices as the ability to meet shortfalls at affordable prices in being eroded by global shortages and rising prices.
Actually, it is higher productivity and efficient supply chain functioning that could contribute to the growth process productively.
The RBI, keeping in view the ongoing trends, is expected to keep inflation within a band of 2-6 per cent. It has been raising lending rates to control inflation. The RBI already delivered a quarter-percentage-point hike in the policy repo rate.
However, accurately anticipated inflation need not redistribute wealth between the borrower and lender. That is to say, if actual inflation rate turns out to be different from the expected rate, unanticipated redistribution would follow suit. Fewer social problems are created in case inflation is (i) lower than higher and (ii) remains steady (that is, relatively predictable) rather than being variable in nature.
Clearly, elevated food prices continue to be a big burden in rural areas, in particular, where disposable income is low and wage hikes have not kept pace with the rise in inflation. Keeping in view all these, it is to be seen how the authority would come out with flying colours in the coming days. Let us keep our fingers crossed!