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India is not alone in seeing a rise in wholesale prices. Today, China reported a 9 percent year-on-year rise in producer prices, the highest in 13 years. This has come about despite the country initiating steps to curb the price rise such as a crackdown on monopolies and hoarding.
While this has not yet translated into an increase in consumer price inflation (like in India), it will, nonetheless, add to global inflationary pressures.
How serious is this rise?
The consensus mostly seems to veer towards the fact that this will be transient, or at worst a problem that needs to be faced after a couple of years. US Federal Reserve Chair Jerome Powell too has been peddling this line to soothe the bond market.
Even the World Bank’s Global Economic Prospects report released yesterday doesn’t seem to buy into these concerns. Although inflation is expected to rise in 2021, for almost all developed countries and half of inflation-targeting emerging economies, it will be within target ranges, the report said. It also added that long-term expectations pointed to continued low and stable inflation although it did warn that if increase in short-term inflation becomes more persistent, it could derail long-term inflation expectations.
But a growing number of influential voices are raising concerns about inflation’s adverse effects on the global economy. Last week, Deutsche Bank’s chief economist David Folkerts-Landau and his team wrote that inflation is likely to persist and become a crisis, if not now, from 2023 onwards.
Most of the analysis and criticism is aimed at the US Federal Reserve which last year pivoted to “average-inflation” targeting – which means it will target higher inflation till it meets employment goals.
Basically, the worry is that when the Fed finally acts, it could be too late. Writing in the Wall Street Journal, Kevin Warsh, a former member of the Federal Reserve Board of Governors, has called on the American central bank to change its policy and stop buying mortgage-backed securities immediately.
In the FT, Martin Wolf argues that because of this policy change the Fed has locked itself into responding too slowly. Ergo, when it decides to act, inflation would have galloped away, and its rate hikes would necessarily be much sharper, which in turn could push the US and other countries into a recession. (This article is free to read for MC Pro subscribers here).
This will be particularly bad since the last decade has seen the fastest and most broad-based rise in the debt levels of many countries. A rise in interest rates would be particularly tough on low-income countries and some emerging markets and could accentuate financial stability risks. Such countries are more vulnerable to capital outflows as well when investor sentiment turns because of inflation pressures in the developed world. This is a risk investors in Indian equities should not ignore.
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