Inflation: Oh ’tis problematic. Or is it?

A student messaged last week, asking some questions about inflation and its measurement in India. In particular, they wanted to know about food and its impact on inflation right now.

Well, outsourcing is always and everywhere a good idea, and Vivek Kaul had already answered the question at great length:

What this means is that, despite the end consumers of food paying a higher price, the farmers are largely not benefitting from this rise in food prices, given that they sell their produce at the wholesale level.
This difference can be because of a few reasons.

a) A collapse in supply chains has led to what is being sold at the wholesale level not reaching the consumers at the retail level, thus, leading to higher prices for the consumer.

b) This could also mean those running the supply chains hoarding stuff, in order to increase their profit.

Having said that, the former reason makes more sense given that stuff like vegetables, egg, fish and meat, etc., cannot really be hoarded. Also, hoarding stuff like pulses, needs a specialized storage environment which India largely lacks.

https://vivekkaul.com/2020/10/13/10-things-you-need-to-know-about-indias-high-inflation/

The entire article is worth reading (and so is subscribing to Vivek’s blog, so please do so!). And if you think 2020 isn’t depressing enough already, do read this article, also written by him. A short excerpt follows:

To conclude, the Indian economy will contract during the second half of the financial year. There is a slim chance of growth being flat for the period January to March 2021. Inflation, even though it might come down a little, is likely to remain high due to the spread of the covid pandemic. Hence, India will see conflation through 2020-21.

https://vivekkaul.com/2020/09/15/conflation-contraction-inflation-is-here-and-it-will-stay-this-year/

From a reading-the-tea-leaves perspective, it would seem the RBI actually isn’t that worried about inflation right now (and rightly so!). Here’s an excerpt from an excellent newsletter, Anticipating the Unanticipated that makes this point:

But the RBI wants to signal it is willing to live with inflation running above ‘comfortable’ level in the coming days. The MPC report last week claimed almost 80 per cent of the increase in inflation beyond the 4 per cent target can be attributed to supply chain disruptions and increase in fuel prices. This it believes is a short-term phenomenon and inflation will be in the 5 per cent range next year. This is underlined to give comfort to bond investors to buy government securities without the fear of a near-term interest rate hike to contain inflation. Further, the other step announced by RBI in extending the HTM (hold-to-maturity) limits by another year to March 2022 is to protect any bondholder from the volatility of prices and booking losses on account of it. The overall RBI signal is it doesn’t want the worry of rising inflation and a consequent rate increase to come in the way of growth. It’s focus now is on improving the transmission of rate cuts to the borrowers to stimulate growth.

https://publicpolicy.substack.com/p/77-the-inflation-conundrum-

… and here is Anantha Nageswaran making the same point, but by utilizing a different analysis:

This exercise generates the hypothesis that there is little or no intersection of the household inflation expectations formation and the monetary policy regime. Two, high inflation expectations peaked in September 2014. Similarly, the current high inflation expectations should peak as supply disruptions ease. So, in my view, RBI is betting correctly that the rate of inflation would ease and project policy on hold for the next few quarters. Three, inflation generation process should matter only to the extent that it affects medium-term output and employment generation. For now, other indicators suggest that it is not as disruptive as it was in 2011-13. Therefore, there is no need to turn it into a fetish. The new MPC and the central bank have done well and done good. They should be pleased.

https://thegoldstandardsite.wordpress.com/2020/10/14/the-inexplicable-16-inflation-rate/

And for the data nerds among you, here is the Inflation Expectations Survey of Households by the RBI (do keep in mind the point Ananta Nageswaran makes about trimmed means in his article). Note that currently at least, not too many people seem to be too worried about persistently high food inflation.

Side note: Jason Furman’s podcast with Tyler Cowen contained this interesting snippet:

FURMAN: GDP could be more meaningful if we measured it better. The inflation rate gets harder and harder to measure over time. So I think the one that probably has deteriorated in meaningfulness is the measure of inflation. Number one, we don’t measure it well, and number two, it’s low enough that it’s hard to get that excited about it.

COWEN: Is that a quality-of-goods problem? Or how we do chaining over time? Where are we going wrong in measuring inflation?

FURMAN: Just more and more of the economy is in areas that are harder to measure the quality of, healthcare being the most notorious.

https://medium.com/conversations-with-tyler/jason-furman-tyler-cowen-economics-b3e6d73dfd0f

I’ve said it before, and I’ll say it again: macro is hard.

Finally, here are past EFE articles on inflation.

Notes from an excellent blogpost by V Ananta Nageswaran

I mean, the simplest thing to do would be to go read the post in its entirety. The notes that follow are my way of reinforcing the key messages for myself, but perhaps they will help you as well.

This piece has five messages. One is that the best way to attract businesses is not to repel them explicitly. Second, it makes the case for a bold but transparent fiscal support. Third, it offers suggestions on how that money could be spent and four, it reminds experts that doomsday scenarios for India are not pre-ordained. Finally, it is important that the government channels the Covid crisis to usher in a decade of better growth than the previous one.

With regard to the first point, about not repelling businesses:

  • The blog post emphasizes the need to facilitate clear instructions for businesses. The key message is that clear communication is always important, but it is literally a life-saver in these times. If you need to issue a clarification, you failed. It is that simple.
  • A related point in this regard comes from an excellent newsletter that is equally worth reading in its own right. Facilitating business also means not throwing out the baby with the bathwater:
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    “Now let’s look at why this is a policyWTF. India’s economy is facing a severe demand + supply shock. Of particular concern is the unavailability of domestic capital for long-term projects such as infrastructure (one of the reasons for this is covered in the India Policy Watch section below). Without long-term investment, India cannot achieve sustained economic growth. And without sustained economic growth, India’s geopolitical options get majorly constrained. An economically strong India becomes an ideal counterweight to China for the US and also an ideal market for excess Chinese capital. In contrast, a weak economy will eventually be forced to throw its economy open to the highest bidder at any point of time (ask Pakistan). Given this key national interest, making it difficult for Chinese investments to find their way into India is extremely counterproductive.”
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    To be clear, this is not the point Ananta Nageswaran was making, but the point that Pranay and A.N. make stems from the root principle that in these times, we need to facilitate business, not hamper it. It can be hampered by a variety of things: unclear communication, blanket bans, or something else.

Now, on to the second point:

However, for a country with a young demographic and a potential for economic growth to exceed the cost of capital in the medium to long-term, the cost of excessive caution and prudence would be higher than the cost of excess action now. This would be so in the medium to long-term even if the short–term costs of excessive fiscal activism appear higher. One such fear is the fear of credit-rating downgrade. That reputational risk must be accepted and ignored, if it materializes. Rakesh Mohan, the former Deputy Governor of the Reserve Bank of India, had the right attitude towards them. In an interview for CNBC TV-18, he is reported to have observed that the credit rating agencies should have been the first ones to be put on the lockdown globally. He is right.

There is a time to worry about rating agencies, rising rates of borrowing, crowding out and profligacy. This, however, is not that time. We can err on the side of doing too little, or too much. There will be errors, we just need to choose which. I agree with A.N. – more is infinitely more preferable.

Suggestions on how money can be spent, which is the third point:

  • Asset sales, by Andy Mukherjee (link gotten from within A.N.’s post)
  • Building out health infrastructure, by the same author (and the same source for the link as above too)
  • Shankkar Aiyyar has an article on BQ that finds mention in A.N’s post, and also has this excellent, excellent analogy:
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    “Epidemiology tells us vulnerability to Covid-19 rises with pre-existing conditions. This is true for economies too. India’s economy, frail from co-morbidity, tripped from slowdown to lockdown.”
  • And Vikram Chandra on Twitter has some suggestions:
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    Note that the list isn’t (and can’t be) exhaustive. But these are all extremely good suggestions!

Fourth, we need to keep reminding ourselves that it’s not all doom and gloom, health-wise and economy-wise, or as A.N. puts its, “experts are poor at predicting”. (Ahem)

And fifth, the bottomline from his blog-post, which I quote in its entirety:

“Finally, that persuades me to throw the ball to the government to play. In times of crises, society looks for guidance and leadership from the rulers. This is time-tested. Therefore, the onus is on the government to demonstrate clarity in thought and purpose in action. India began the last decade badly and ended it with more questions than answers. An encore will be a tragedy. India should do whatever it takes to avoid it.”

 

 

Keep an eye on China stories #1

  1. This one isn’t about China per se, it is about how the corona virus is caused by 5G – but the story does begin with Wuhan:
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    ” Sploshing about this sludge are six main coronavirus conspiracy theories: that 5G is, somehow, dangerous; that 5G worsens the effects of coronavirus by weakening your immune system; that 5G outright causes coronavirus-like symptoms; that the coronavirus lockdown is being used as cover to install 5G networks; that Bill Gates had something to do with it; and, finally, that this is all an Illuminati mass-murder plot. None of these conspiracy theories have a shred of truth in them, while some are outright dangerous.”
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  2. Imagine that you are a Chinese strategist. What course of action would you recommend when you see the level off hatred and venom the world has towards China?
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    “I think that’s exactly right. For years, people who think seriously about China’s political trajectory have said that the biggest risk in the US-China relationship is that there will come a time when China, because of something like an economic depression, would need to rally people around the flag in a particularly acute, brittle, aggressive way. This tool has been built into Chinese politics: When needed, you can direct your animus, your political energy, against a foreign opponent.”
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  3. Ananta Nageswaran on much more than just China bashing:
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    “For two nations to collaborate, both sides have to trust each other and share information. In the case of Covid-19, the People’s Republic of China did not do so. Just to recap, there were three major failures and at least one of them continues to this day:(1) Suppression of the flu outbreak for five to six weeks

    (2) Banning travel from Wuhan only to other parts of China

    (3) Not reporting the true number of infections.

    One does not even have to go into the spin on controlling the infection more efficiently than others; ridiculing other nations and even daring to suggest that the virus originated elsewhere.”
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  4. “All Chinese businesses, large and small, have struggled since COVID-19 emerged at the beginning of this year, forcing stores, restaurants, and factories to cut down on hours or completely shutter. While the full economic impact of the outbreak on China’s economy is still uncertain, popular business writer Wú Xiǎobō 吴晓波 detailed in a recent report that about 247,000 Chinese companies declared bankruptcy in the first two months of 2020.”
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    Here we go…(This link is from Mahesh Avasare)
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  5. China, or the USA? The world?

EC101: Links for 11th July, 2019

  1. “The two approaches reflect different attitudes toward risk, the role of government and collective social responsibility. Analogous to America’s debate over health insurance, the American philosophy has been to make more resilient buildings an individual choice, not a government mandate.”
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    Risk, how (not) to measure it and therefore understand it. As Taleb is fond of saying, “The absence of evidence is not the evidence of absence”.
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  2. “Is it possible that interest rates are a net input cost in the Indian context? This existential monetary question is yet to be even acknowledged by economists, let alone addressed.”
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    A superb (and I use the word advisedly) overview of monetary policy and how it works in India.
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  3. “I would challenge my students at the start of the new semester with the following three questions; 1) how much does it cost you to go to the beach (we lived in a coastal city)? 2) should Tiger Woods mow his own lawn? or 3) should Lebron and Kobie go to college?”
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    Opportunity costs, economic costs and accounting costs – all in one article, and therefore a great read.
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  4. “The cornerstone of Harvard professor N. Gregory Mankiw’s introductory economics textbook, Principles of Economics, is a synthesis of economic thought into Ten Principles of Economics (listed in the first table below). A quick perusal of these will likely affirm the reader’s suspicions that synthesizing economic thought into Ten Principles is no easy task, and may even lead the reader to suspect that the subtlety and concision required are not to be found in the pen of N. Gregory Mankiw.”
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    A hilarious (but perhaps only to an economist) take on the ten principles of economics.
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  5. “And the long version of the history is crucial here. It shows that for much of the 20th century, total taxes on the very wealthy were much higher than they are now. Before World War II, the average rate hovered around 70 percent. From the mid-1940s through the mid-1970s, the average rate was above 50 percent.”
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    David Leonhardt on taxing the rich in America. His newsletter is worth subscribing to, by the way.

India: Links for 10th June, 2019

  1. How does the Reserve Bank of India aim to spread awareness about key topics to as many people as possible across the entire country. It uses a concept called Financial Literacy Week, among other things. Posters and leaflets will be circulated to rural banks, and a mass media campaign will be carried out throughout June (on Doordarshan and All India Radio) – this time, with a specific target in mind: farmers. (Via Mostly Economics)
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  2. “In the circumstances, measures that can minimise wastage and increase the local holding capacity of farmers so as to stagger supply release can be an area of engagement to increase farm incomes. In many respects, this may perhaps be the most promising medium-term intervention to increase farm incomes.”
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    Gulzar Natarajan asks how farm incomes can be increased. He suggests a way to increase storage capacity and improve it over time. Completely agreed – but I’ll reiterate (and I think he’ll agree), the best way to have farm incomes go up is to have lesser people be engaged in agriculture.
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  3. Anantha Nageswaran comes up with a thoroughly delectable set of links about “advice” for the new government in India. Each of the links is well worth reading. In fact, I would recommend that an hour going through these links is well worth your time.
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  4. “Agriculture is a like any other business—the farmer needs the freedom to enter into contracts, use it to raise credit, tie up insurance, seek advisory and inputs to get a fair return on his land. The instrument for this is contract farming—whether individually or in a group backed by a regulatory mechanism. Paracetamol policies like loan waivers have detained the modernisation of agriculture, resulting in poor output from a large mass of precious land and half the workforce. ”
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    This actually is one of the links in 3. above, but it is too good to not share in it’s own right. As Prof. Nageswaran says, full marks!
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  5. “The GLP was initiated in August 2018 through a partnership between Pratham and the Uttar Pradesh Basic Education Department and sought to target all primary school children in UP. There were three aims: (i) significantly improve their learning levels in basic reading and arithmetic, (ii) introduce and sustain innovative teaching-learning practices in schools, and (iii) build monitoring, mentoring, and academic support capacity at block and district levels. After some delays, by January 2019, the programme reached classrooms across all 75 districts.”
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    Read, and hope. The most encouraging thing I have read in 2019.