inflation - not to worry yaar

[VISHAL JAIN]

DEAR friends and all


now a days we are afraid of inflation accordingly stock market is also reacting.But we should know that our growth rate is also keeping pace with inflation ie.9% on an average.Further it will not to our astonishment that we are ne of the fastest frowing country.

I have attahed two files herewith explaining same .

Pls comment and share ur views.

thankss

vishal Jain

 

[aca_trader]

DEAR friends and all


now a days we are afraid of inflation accordingly stock market is also reacting.But we should know that our growth rate is also keeping pace with inflation ie.9% on an average.Further it will not to our astonishment that we are ne of the fastest frowing country.

I have attahed two files herewith explaining same .

Pls comment and share ur views.

thankss

vishal Jain

The problem with inflationary growth is that it's not sustainable. Once the business cycle starts reversing, the growth rate would start waning due to demand side imbalance. At that moment of time, a number of in-elastic factors of production like wages would not go down significantly thereby reducing the margins of the companies (As demand is already waning causing reduction in prices of input) and will ultimately cause recession.
Hence, it's necessary to tame the inflation.

Though, the methods adopted today are focusing in wrong direction of monetary sqeeze instead of easing out the supply side constraints.

Best Regards,
--Ashish

 

[oxusmorouz]

The problem with inflationary growth is that it's not sustainable. Once the business cycle starts reversing, the growth rate would start waning due to demand side imbalance. At that moment of time, a number of in-elastic factors of production like wages would not go down significantly thereby reducing the margins of the companies (As demand is already waning causing reduction in prices of input) and will ultimately cause recession.
Hence, it's necessary to tame the inflation.

Though, the methods adopted today are focusing in wrong direction of monetary sqeeze instead of easing out the supply side constraints.

Best Regards,
--Ashish

The lag associated with taking remedy in the supply side is quite high and it simply can't be done in the short term. The financial markets adjust more rapidly than the goods market or the supply side to changes in government policies which explains why the central banks prefer monetary policy as a tool in curtailing inflation.
In the current cycle, the increase in interest rates keeping the supply of money constant would affect demand negetively thereby decreasing the price levels prevailing in the economy. The adjustment to this change is quite rapid as is visible in the current scenario.

However, this is quite oxymoronic since the decrease in price levels itself would increase the real money supply in the economy leading to decrease in interest rates (yield) and the cycle reverts back to the original case. It is during this transition that the government looks in for other fiscal policy/supply side remidies to sustain the growth and keep price levels where they are.

 

[aca_trader]

The lag associated with taking remedy in the supply side is quite high and it simply can't be done in the short term. The financial markets adjust more rapidly than the goods market or the supply side to changes in government policies which explains why the central banks prefer monetary policy as a tool in curtailing inflation.
In the current cycle, the increase in interest rates keeping the supply of money constant would affect demand negetively thereby decreasing the price levels prevailing in the economy. The adjustment to this change is quite rapid as is visible in the current scenario.

However, this is quite oxymoronic since the decrease in price levels itself would increase the real money supply in the economy leading to decrease in interest rates (yield) and the cycle reverts back to the original case. It is during this transition that the government looks in for other fiscal policy/supply side remidies to sustain the growth and keep price levels where they are.

I do agree with the short-term prescription but is it really the time to contain inflation through short-term remadies?

It's quite obvious that major cause of the recent inflation is astronomical rise in the price of daily-usage commodities which constitute 22% of WPI. Now if we are trying to contain demand then I fail to understand how the impact of the rising prices of commodities will be offset by reduced demand and thereby prices of cement, automobiles and realty. No doubt it would contain WPI figures to sub-5.5% level but that would be a sham, a window-dressing and nothing else.

Further, the psychological factor also needs to be discounted when we see the demand of non-food credit getting slower. Today, the rate increases are a kind of shock to the consumer. He was very much comfortable with getting cars and homes financed at 8-9% pa. Now a rate of 12% seems very astronomical to the same consumer and hence he is deferring the purchase-decision at the moment in the hope of rate-reduction. Mind it! deferring and not cancelling. Once the rates do stablise, the growing purchasing power will again push the demand higher. I wonder what the policy-makers will do then?

Best Regards,
--Ashish

 

[oxusmorouz]

I do agree with the short-term prescription but is it really the time to contain inflation through short-term remadies?

It's quite obvious that major cause of the recent inflation is astronomical rise in the price of daily-usage commodities which constitute 22% of WPI. Now if we are trying to contain demand then I fail to understand how the impact of the rising prices of commodities will be offset by reduced demand and thereby prices of cement, automobiles and realty. No doubt it would contain WPI figures to sub-5.5% level but that would be a sham, a window-dressing and nothing else.

Further, the psychological factor also needs to be discounted when we see the demand of non-food credit getting slower. Today, the rate increases are a kind of shock to the consumer. He was very much comfortable with getting cars and homes financed at 8-9% pa. Now a rate of 12% seems very astronomical to the same consumer and hence he is deferring the purchase-decision at the moment in the hope of rate-reduction. Mind it! deferring and not cancelling. Once the rates do stablise, the growing purchasing power will again push the demand higher. I wonder what the policy-makers will do then?

Contradictarily, rather than curtailing demand, if supply were to be increased to maintain inflation low, new plants have to be commissioned, manufacturers have to be given sufficient incentives to boost up their capacity. Think of the time duration involved in making this successful...expansion takes time!! How long can the government regulate the prices of commodities like cement?

By rising rates, demand for loans would be affected negetively and as you said, the average consumer would postpone his purchase decision. This in the short run would push prices down. By the time the purchasing power of the consumer allows him to make the purchase, the government would have sufficient time to make manufacturers boost up their capacity to meet the probable demand. Manufacturers of commodities have already engaged in expansion (as you would be aware) and this could increase the supply just in time to meet the rise in demand thus having a stabilizing effect.

You see, monetary tools can never be used independenly because of their short term effect. They are to be used in conjunction with fiscal policy/supply side measures...which is exactly what our government is trying to do!

 

[aca_trader]

Contradictarily, rather than curtailing demand, if supply were to be increased to maintain inflation low, new plants have to be commissioned, manufacturers have to be given sufficient incentives to boost up their capacity. Think of the time duration involved in making this successful...expansion takes time!! How long can the government regulate the prices of commodities like cement?

By rising rates, demand for loans would be affected negetively and as you said, the average consumer would postpone his purchase decision. This in the short run would push prices down. By the time the purchasing power of the consumer allows him to make the purchase, the government would have sufficient time to make manufacturers boost up their capacity to meet the probable demand. Manufacturers of commodities have already engaged in expansion (as you would be aware) and this could increase the supply just in time to meet the rise in demand thus having a stabilizing effect.

You see, monetary tools can never be used independenly because of their short term effect. They are to be used in conjunction with fiscal policy/supply side measures...which is exactly what our government is trying to do!

What I am trying to convey is that right tools are being used at wrong time. One does not use moving-average crossover systems when market is in congestion.
In case the inflation would have been demand propelled, the current policy of monetary sqeeze would have been exactly correct. However, in current scenario, the food commodity driven inflation will only be window-dressed with interest rate driven demand curtailment of items which are not major constituents of current inflatonary trend. Afterall, the measures would not be able to reduce demand for essential commodities.
The only impact of these measures will be that growth will be slowed down as it did not more than a decade back. The correct short-term policy at this moment should be lowering down the import duties on essential commodities but then paranoia is a part of psyche of our policy-makers.

 

[oxusmorouz]

What I am trying to convey is that right tools are being used at wrong time. One does not use moving-average crossover systems when market is in congestion.
In case the inflation would have been demand propelled, the current policy of monetary sqeeze would have been exactly correct. However, in current scenario, the food commodity driven inflation will only be window-dressed with interest rate driven demand curtailment of items which are not major constituents of current inflatonary trend. Afterall, the measures would not be able to reduce demand for essential commodities.
The only impact of these measures will be that growth will be slowed down as it did, not more than a decade back. The correct short-term policy at this moment should be lowering down the import duties on essential commodities but then paranoia is a part of psyche of our policy-makers.

Right! But decreasing the import dutites on essential commodities is likely to affect our gdp negetively (due to increase in imported goods) and also put pressure on our current account --->(leading to) decrease in money supply --->(and eventually to) increase in interest rates.

A school of thought in modern day economics (by Milton Friedman, a nobel prize winner) pointed out the high degree of correlation associated with real money supply and inflation, and held that inflation will increase when money supply growth exceeds the growth in real economic activity holding velocity of money constant...concluding that inflation is purely a monetary phenomenon caused by fluctuations in the supply of money...which can be controlled purely from this perspective (as stated in his book "monetary history of united states")

However, I guess these are subjective issues and like Elliot Waves, an after fact curve fitting would the best solution

 

[aca_trader]

Right! But decreasing the import dutites on essential commodities is likely to affect our gdp negetively (due to increase in imported goods) and also put pressure on our current account --->(leading to) decrease in money supply --->(and eventually to) increase in interest rates.

A school of thought in modern day economics (by Milton Friedman, a nobel prize winner) pointed out the high degree of correlation associated with real money supply and inflation, and held that inflation will increase when money supply growth exceeds the growth in real economic activity holding velocity of money constant...concluding that inflation is purely a monetary phenomenon caused by fluctuations in the supply of money...which can be controlled purely from this perspective (as stated in his book "monetary history of united states")

However, I guess these are subjective issues and like Elliot Waves, an after fact curve fitting would the best solution

You are right about changes in theories.
Classical Economics tells us that import causes slow down of GDP but there is a live paradox in US economy. "Economic growth has been more than twice as fast, on average, in years in which the current account deficit grew sharply compared to those years in which it actually declined. If trade deficits drag down growth, somebody forgot to tell the economy."

Obviously, hindsight will provide the only answer.

 

[oxusmorouz]

Obviously, hindsight will provide the only answer.

Truly...