The world is focusing aggressively on the growing Inflation numbers and there is high expectation being built that interest rates will be going up. There is a brewing discussion going on the street about the interest rate hike and who will press the buzzer first. We need to analyse the data of inflation and its sources to get a brief understanding of the same. Well if we look very clearly behind the inflation numbers we will find that two types of inflation numbers are being analyzed 1) supply chain and production-related inflation and 2) YoY low base impacted inflation.
The 1st one is related to the pandemic based unlock and lock model where the demand is picking up and suddenly one fine morning the brakes of growth are placed due to rising covid. For example in India, we find that the in last 6 months demand started picking up and investments and production was scaling up and then suddenly the deadly 2nd wave created a significant slowdown and brakes on the supply side and hence the impact on prices is very clear.
Worldwide we find that steel prices are going up but it’s due to China placing curbs on production as well as demand going up from the same country. Now as infrastructure is going to be the prime focus and country like India focusing aggressively on real estate to drive growth for the economy the demand for cement, steel and other industrial products will grow but due to the lack of labours and production slowdown would lead to a significant jump in inflation. This inflation is created due to supply chain and production-related. This inflation can be controlled by checks and balances created from the government end.
If we look at the medical infrastructure we find that inflated prices have been one of the key contributors to the inflation created from non-food items. The lock and unlock and virus spread & impact are the key contributors to inflation.
Now when we come to measure the 2nd category of inflation we find that last calendar year 2020 as the world was under lockdown and production etc was halted completely the inflation numbers came down. Every macroeconomic number across the globe was down. The international crude prices fell to the lowest level as every transportation was shut down across the globe. Now this year when the lockdown is not as same as it was last year and travel restriction are not so stringent we are bound to get a YOY jump in macro numbers and inflation too.
The stimulus and consumption followed by the slow growth of vaccination drive the show for the inflation. If we take the U.S economy we find that inflation is rising since its population is getting vaccinated. In the U.S we find 250 million vaccine shots have been given in 114 days, followed by from 5.5% to nearly 60% of the adults in America with at least one shot in their arm. In short, U.S has vaccinated 37% of its population till now whereas India has just made meagre 2% to 3% of its 140cr population.
Hence has the demand picks up in developed and high-frequency vaccination countries the supply side mismatch will continue as long as those countries take time and delay in getting vaccinated. This is going to increase the YOY and supply chain and production linked inflation. Labour shortages are going to be one of the massive reason for inflation since rural India is impacted and the urban does not provide anything promising currently.
Food inflation is going to be higher as rural India is highly impacted due to the 2nd wave. Now if the 3rd wave comes then it’s also going to impact rural India. Production of food items will face hiccups and hence the same will be reflected in prices. Well if we look at the food items prices at the ground level and not those CPI and WPI indicators we get a clear understanding of the 2nd wave impact on rural India.
The vaccination is the remedy towards inflation control for India and all those countries that are struggling with a lower rate of vaccination. The reverse impact of this will be cut down on consumption and more streamlined on cutting down household expenditures as the job market is not stable and salary cuts are back on street. Further stupendous medical expenditure is bound to bring down consumption and hence the Indian inflation will come be controlled but will not come down.
Rising interest rates either in U.S or India or any country will not solve the problem. Inflation needs to be ignored since job creation across the globe is a herculean task. If the interest rates are hiked then the corporate segment will not be able to face the rising cost of debt. A country like India cannot afford to have interest rates going up as inflation has increased since the population and the country does not reflect the correct image of the 2nd wave related economic impact.
Further, as more countries look forward to the reduction of carbon emission the same would create supply-side disruption and hence the inflation on the industrial front will persist as long as other countries do not come up to fill up the gap. Hence inflation cannot be ruled out. It the vaccination which get those countries to fill up the gap of production.
If vaccination is done slowly then it impacts the opening up of the economy as industries and business will not be waiting too long for the vaccination to get executed and the delay will lead to 3rd wave and lock, unlock the game. Demand will pick up but if the supply side not there no RBI can help. Inflation can be controlled through faster vaccination bridging the gap of the supply side.
Pulling investments and without supply, chain support will provoke inflation only. Making over the losses of last year is the capitalist theory which can be prevented through vaccination creating balance within the economy.
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