A winning trifecta?

"Soaring consumer prices, supply chain shocks, rising energy costs and a hawkish Federal Reserve determined to bring inflation under control: These are the worrisome attributes of the US economy that have some experts sounding the alarm over a possible return to 1970s-style 'stagflation'," Fox. "Former Treasury Secretary Larry Summers, a prominent inflation hawk, has accused the Fed of misinterpreting the inflation spike and waiting too long to take action to quell the price spike." "The US central bank must move 'expeditiously' to bring too-high inflation to heel, Federal Reserve Chair Jerome Powell said on Monday, adding that it could use bigger-than-usual interest rate hikes if needed to do so," ET. Last week the Fed raised its Funds Rate by 25 basis points and signaled six more rate hikes this year, ET. "By the end of next year, Fed policymakers expect the the central bank's overnight interest rate to be at 2.8%, bringing borrowing costs to a level where they would actually start biting into growth." "Despite volatile markets and inconsistent economies triggered by Russia's ongoing invasion of Ukraine, European Central Bank President Christine Lagarde has played down concerns about eurozone stagflation," AN. "Even in the bleakest scenario" she expects growth at 2.3%. "There is no prospect of the economy falling into a stagflation vortex and retail inflation is expected to moderate going forward," Reserve Bank Governor Shaktikanta Das said. "In a similar manner, the governor also expects the rupee to remain stable," BS. Not only does the RBI expect inflation to remain below 6% but also expects it to fall going forward, he said, LM. We don't know if his predictions are based on profound knowledge of macroeconomics and geopolitics or on reading the tea leaves of his morning cuppa but a strong dose of bromides is soothing for Indian markets. Petrol and diesel prices were increased by Rs 0.80 and the price of cooking gas by Rs 50 to Rs 949.5 for a 14.2 kg cylinder yesterday, TIE. Petrol and diesel prices were hiked by Rs 0.80 again this morning, TIE. Since transport costs affect all goods and services, we can expect consumer price index (CPI) to rise further. "The biggest gainer will be the country's biggest bond issuer: The government," wrote Pramit Bhattacharya. "The government can choose to raise taxes explicitly to fund its deficit, bringing down its debt levels. Or it can allow inflation to rise, which will raise the nominal GDP numbers, improve tax collections (at least in nominal terms), and bring down the debt to GDP ratio (by inflating the denominator)." "Keeping an accommodative stance is a key component of RBI's strategy to manage this tension. In other words, the high levels of government debt limit the autonomy of RBI in using monetary policy tools to fight inflation: a phenomenon economists describe as 'fiscal dominance'." In short, the RBI has become redundant. "As always, poor workers in the informal sector will be hit hardest as their ability to bargain for higher wages is relatively weak, and they have no recourse to any inflation hedge." These people will be grateful for any handouts they get, which was one of the reasons why the BJP won UP assembly elections recently, TIE. Rising prices, a hamstrung RBI and selective handouts makes a winning trifecta. Until it goes out of control.