What have we got to do with Phillips Curve?

"Perhaps the greatest scholastic challenge is currently being faced by central banks across the world. They must deal with rising inflation," wrote Soumya Kanti Ghosh and Prof V Anantha Nageswaran. "But, two problems confront them. One, they cannot raise interest rates because they have got everyone addicted to low or no rates. And, two, inflation caused by supply disruption is not amenable to monetary treatment." Inflation can be explained by the Phillips Curve, which states that "inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment," Investopedia. Inflation is dependent on output gap and inflation expectation. "The output gap is is an economic measure of the difference between the actual output of an economy and its potential output," IMF. A negative output gap means there is spare capacity in the economy so rising demand can be met by increasing output and will not lead to higher prices. Inflation in India cannot be explained by output gap or inflation expectation, wrote Ghosh and Nageswaran, According to a survey by the Reserve Bank of India (RBI) "Households' median inflation perception for the current period stood at 10.3% in July compared with 10.2% in May," Bloomberg Quint. "The aggregate capacity utilisation level increased to 69.4% in the quarter ended March 2021 from 66.6% in the previous three months," so there is plenty of spare capacity and no need for prices to rise. Consumer confidence is down which would lead to less consumer spending and lower demand. In the last meeting of the Monetary Policy Committee of the RBI "The Consumer Price Index (CPI) inflation for the financial year 2022 (1 April 2021-31 March 2022) was projected at 5.3 percent," HT. "Perhaps, it is possible to hypothesise that inflation in India reflects an economy that is supply-constrained with productivity of enterprises held back by a license-compliance-inspection system." "The pandemic has disrupted nearly every aspect of the global supply chain -- that's the usually invisible pathway of manufacturing, transportation and logistics that get goods from where they are manufactured, mined or grown to where they are going," ET. "Before the pandemic, sending a container from Shanghai to Los Angeles cost perhaps $2,000. By early 2021, the same journey was fetching as much as $25,000." "Companies around the world are about to get socked with even higher prices on everyday items, companies from food giant Unilever Plc to lubricant maker WD-40 Co warned this week as they grapple with supply difficulties," ET. If prices go up workers will demand higher wages. In the US, "Average hourly earnings jumped 0.6% for the month, about double what Wall Street had been expecting, and the increase from a year ago stood at a robust 4.3%, up from 4% rise a year ago," CNBC. In India, "The price of petrol and diesel in Delhi have now jumped to Rs 107.59 per litre and Rs 96.32 per litre respectively," ET. This is because of enormous taxes on fuel. "Over 5.95 crore (59.5 million) income tax returns (ITRs) for the fiscal year ended March 31, 2020 (2019-2020) were filed by January 10, the Income Tax Department said," ET. This was one year before the pandemic. If only 59.5 million, out of a total population of 1,300 million, earn enough to file tax returns, and prices are still rising at 5.3%, it is hard to imagine where prices will reach if more people start earning a respectable living. No wonder, a study by BrokerChoose reveals that 100 million Indians own cryptocurrencies," TOI. If people do not earn enough of our currency, which earns less everyday, they gamble on currencies that don't exist. Phillips Curve is for other countries. We have the cow, News18.