Against the backdrop of the upcoming G20 summit in New Delhi, India’s Prime Minister Narendra Modi in an interview with Moneycontrol, apart from speaking about the role that India can play in the world economy, highlighted how inflation was a key issue that the world faced. It requires finance ministers and central bankers to work together to combat inflation. There has been quite a turnaround of fortunes as far as global inflation, especially in developed countries, is concerned.
On analysing the decadal average of inflation in the developed, and emerging and developing economies, we see interesting comparisons. The decadal average inflation in developed economies has declined in each decade from 1980 to 2020. In the case of emerging and developing economies, average decadal inflation rose in the 1990s compared to the 1980s but declined sharply thereafter.
In fact, in most of the developed world, inflation has not been a problem in the last 40 years. The average inflation of developed countries in the period 1980-2019 was 3.2 percent and in the 20-year period of 2000-19, it was 1.8 percent. Post the global financial crisis of 2008, the average inflation was just around 1.5 percent. Most of the macroeconomic discussions post-2008 crisis was on raising inflation levels in the developed countries, as it was lower than the targeted 2 percent in most of these economies.
The 20-year and 10-year average inflation for developing economies has been 6 percent and 5.2 percent, respectively. Unlike the developed countries that saw a decline in inflation in nearly all the economies, the experiences of developing economies were not even. Within developing nations, inflation is seen rising in economies every now and then. This is mainly because the share of food and fuel is much higher in their inflation baskets compared to the developed economies. Food and fuel prices are highly volatile, and when they increase, inflation rises. The monetary policy frameworks of developing countries are also not as sophisticated as those of developed countries, which means inflation expectations are not as well anchored.
Change In Trends
Inflation trends and differences in developed and developing countries changed dramatically post-pandemic and the Russia-Ukraine war. Inflation in developed countries rose to 3.1 percent in 2021 and 7.3 percent in 2022. In the developing countries also, it rose to 5.9 percent and 9.8 percent in the same years. This sudden rise in inflation led to a reversal of the low inflation trend of 40 years. Central banks of developed and developing economies were pushed into a corner and had to raise interest rates significantly. The sudden rise in interest rates posed challenges for financial markets with bank failures in the US and Europe in early 2023. Surprisingly, the developing countries managed the situation well.
Inflation has since cooled in 2023 but is still higher than the inflation target of 2 percent in developed countries. At the recently held Jackson Hole conference, central bankers of developed economies emphasised that inflation was still high and they would do every bit to bring it down to 2 percent. So, it is not surprising that the Indian prime minister has mentioned inflation as a key issue faced by the world economy.
Where does all this discussion leave India? Interestingly, India’s inflation has been lower than that of key developed economies in the 2022-23 period. India has historically always had higher inflation than these economies but since March 2022, it has had lower inflation than the euro area and the UK. There were a few months (Nov 21-Mar 22) when India’s inflation was lower than that experienced by the US. Inflation in the UK and European economies were deeply connected to the oil and gas supplied by Russia. As the Russia-Ukraine war broke out, disrupted supplies led to record inflation levels. India, on the other hand, could buy Russian oil and manage the shocks much better. India’s inflation targeting framework, launched in 2016, has matured a bit and that also helped anchor inflation expectations.
Government Intervention
Apart from the RBI, the government has also intervened to control inflation, especially in food prices. The government banned the export of non-basmati rice, restricted the export of onions, reduced the price of LPG cylinders by Rs 200 and so on. However, these export-restricting decisions in a way lead to higher global inflation, as India is a major supplier of these agricultural commodities. The reduction of LPG price might provide short-term relief but over the long-term, it will lead to higher subsidies, which in turn could be inflationary.
Overall, high inflation has become a focal point for the G20 after many years of low global inflation. The developed countries are facing the heat as their economies had already slowed before the pandemic. The World Bank has already projected a lost decade of 2021-30 for the world economy, with developed economies at the forefront of the slowdown. A further tightening of monetary policy or monetary policy conditions will deepen the slowdown in the economy. India should also not be complacent in its fight against inflation. India’s inflation may be lower than the developed world’s but it has been higher than the target for most months since the pandemic. Thankfully, the RBI has stressed that it is committed to bringing inflation to 4 percent over time.
Amol Agrawal teaches at Ahmedabad University, and is the author of 'History of Private Banking in South Canara district (1906-69)’. Views are personal, and do not represent the stand of this publication.
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