Inflation: Up, up and away!

Since the world’s major economies reopened after Covid-related lockdowns, they have been heating up, what with pent-up demand, consumers on a spending spree, travelling, dining out and catching up on a host of social activities that were not possible during lockdowns. All that heated spending and pent-up demand, with supply chains not catching up, led to soaring inflation.

Supply shortages, everyone said. And we have inflation balloon number one right there. Shoot it down, like the Chinese spy balloons? Oh no, please don’t shoot the only supply chain hub we have, at least for semiconductors. It’s located way over in the east of the world, in Taiwan, South Korea and well, China. And they’re not just down with a bad case of the Delta variant, they’re the reason I can buy my electric car, my new computer, my next smartphone… well, not immediately, but by and by.

Buy and buy. How much can people possibly buy? Well, if all of us got those fat relief and stimulus cheques, we’d have been sitting on a nice savings cushion as well. And looking forward to splurging it all someday. The chaps in the US, UK and Europe were not merely protected against job losses, they accumulated savings as well. And guess what? Many are reluctant to return to work, or to accept the first job that comes their way. You’re looking at the signs of inflation balloon number two now.

Employers were not just raising the minimum wages in certain places, they said they’re willing to offer a higher salary if only the skilled people would show up at work. Oh no, we’ll just wait it out a little longer, said the skilled folks. The virus is still around, we can’t get childcare, we don’t want to contract Covid again, so thank you. And while inflation balloon number two is still growing, what’s that far away on the horizon, I see? Is it a bird, a plane, or wait, another balloon?

Turns out that in China, people had just about had enough of the zero-Covid policies. Cooped up in their homes under strict surveillance for almost three years with testing almost on a daily basis, tested their patience no end. We folks in India were locked down for just three months in 2020, and what a terrible time it was too. Three years?! Well, little wonder they took to the streets to protest against what they thought were draconian policies, when the rest of the world was back at work, going about their daily business, and enjoying themselves.

The authorities, believe it or not, relented. Under different circumstances they might have sent the tanks in. But this time, they relaxed the restrictions almost completely! Including the travel and quarantine restrictions. Now you are a free bird… er, balloon… you can fly wherever you please. And millions of Chinese took to the skies and were off to foreign shores. Not quite like the Chinese spy balloons, which were being spied around the same time.

Now, nobody’s grudging the Chinese their new-found freedom to travel and spend. In fact, those in the West most certainly welcome it, as it might get their slowing down economies growing again. How much can people buy… you ought to ask the high-spending Chinese that. But of course, China reopening its economy and returning to business puts pressure on the demand for commodities most. Before you know it, prices of oil, steel, aluminum, copper, etc will start soaring again. Ooh, we have inflation balloon number three here, then, don’t we?

The reasons for inflation are all very well. But what are the central banks to do about it? How do we bring it down, without er, disinflating our economies entirely? Inflation targeting, of course, though shooting balloons down is not an option yet. That means pulling back all the easy money pumped in, to stimulate the economy during the pandemic. And, increasing interest rates, of course. And so it has been for the past year or so, that central banks around the world are raising rates, in order to curb consumption and investment demand a little.

Is inflation responding yet? Well, we’d have to admit it’s still at stubbornly high levels everywhere, even if it seems like they’re floating down slowly in the right trajectory. However, that inflation might be ticking down while interest rates balloon, is also a possibility, right? You bet. The US dollar strengthening against all major currencies is nothing but another kind of balloon forming. It makes other countries struggle with weak currencies that raise the cost of imports, and with capital leaving their shores. It also hurts the corporate earnings of multinationals, who it appears are repatriating lower profits home.

Don’t get me wrong, though. All the balloons are not concentrated in the US and around emerging economies in Asia. Across the large Atlantic pond, we have a curious combination of Brexit and the energy crisis, emerging out of the war in Ukraine, playing out in the UK. Together, it’s been dubbed the cost of living crisis. And it seems to be taking a heavy toll on ordinary people. The country is racked with strikes of all kinds, from teachers and hospital staff to rail workers and airlines. And they all want their wages to be raised by an amount that compensates against inflation. Could it be inflation balloon number four in the making? Depends on how the government deals with it.

In Europe, where the impact of the Ukraine crisis is being felt the most acutely, inflation is still a big balloon up there. Rate hikes by the ECB are likely to continue, as they were increased by 50bps again, despite the Credit Suisse Bank meltdown. But they have to be cautious because the biggest cause of inflation across the Eurozone and EU is energy prices. The saving grace was that this winter wasn’t as harsh or severe, and most countries had secured enough supplies before winter set in. The good news for now is that the Eurozone has just about escaped recession, as has the UK. But many experts think that the US might tip into a mild and short recession around the end of this year, thanks to all the aggressive rate hikes.

Do they have a choice? Not, if you look at the last non-farm payroll numbers that came in in the first week of March. February saw more jobs being created at 311,000 compared to the estimates of 225,000, putting greater pressure on the Federal Reserve to increase interest rates in order to combat inflation. Which means even greater pressure on the rest of the world economies, as they cope with outflows of capital, higher import bills and greater volatility. Unfortunately, we have a bank meltdown there as well, with Silicon Valley Bank and a few others, that the government is trying to save and prevent a contagion. Last I checked the news from the US was still an expectation of a 25bps rate increase on account of this latest development, or else a pause this time.

Back home in India, the biggest balloon flying high right now is the celebratory G20 one. This will be accompanied by many smaller ones arising out of all the state elections we have this year, with the first round of those in the Northeast going to the ruling BJP. About the inflation balloon, none seem to be overly concerned. Consumer price inflation has even stopped mattering in elections when earlier, governments have been toppled by rising prices. Even though core inflation has been stuck at around 6% for a few years in India, which makes it worse than US, UK and Europe. And even though unemployment is high at over 7% and has been so for decades, let alone years.

We are the fastest growing major economy, you see. Surely, we therefore have a right to have higher inflation than others. Never mind that our inflation balloon is the result of government raising taxes on fuels for years. Our balloon flying higher than yours, then?

Before the year is out, and especially if the US goes into a mild recession coinciding with China’s economic recovery, everyone will be pointing fingers at, you guessed right, China. Blaming it for all the inflation balloons, not to mention the spy balloons.

China’s response will be a customary shrug of the shoulders. No way, this is a gross misrepresentation of the facts. We were locked down for three years, remember, while the rest of you were having a good time? Besides, we have no inflation to worry about, which we can always tell from pork prices.

Handle your own balloons. Grow up everyone!

The animated gif of parachutes landing in New York City is by Fusion on Giphy and I thank them for it.

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