Policymakers and editorial writers are discussing that Inflation is increasing because of supply bottlenecks and disruptions, mainly considered key factors contributing to inflation.
In December 2021, the consumer price index (CPI ) inflation stood at 5.59%. However, the same rate in January 2020 was 7.59%. Thereafter, it started to come down. But it touched again 7.61% in October 2020, then again came down, after touching a low of 4.35% in September 2021, it has risen to the present level.
Did you know that the Whole Sale Price Index has always been double digit since April 2021?
Indian policymakers have taken the view that growth is more important and the level of CPI can be very intense in our upcoming future. The policymakers have, until now, continued with the same policy stance of stimulating economic activities by lowering interest rates.
Even if we are looking towards the problem from the demand side, we can’t ignore the problem from “Monetary Demand”. Because recently excessive liquidity in the US has ballooned the balance sheet of the Fed that has finally led to increasing in price which was not seen in the last several decades.
It is interesting to note the data on liquidity in India a little bit more closely. “Reserve Money” growth has always been high since April 2021, although year on year growth has shown a decline. Money supply growth has been subdued – that is less than the growth rate of reserve money growth rate. In short, lower growth in money supply gives a signal of less liquidity.
Well, we have a lower credit growth rate and resulting in a low money multiplier. A supply bottleneck can affect the “relative price” only, not the “general price” unless it is accompanied by liquidation expansion.
The Ease of Money Policy
In the current Covid Era, we have seen the ease of monetary policy which can be understood and appreciated. But…do not ignore its impact on the price level or must say inflation. While focusing on low-interest rates, policymakers should not forget the positive relationship between liquidity and inflation.
We know that extra government expenditure, low-interest rates are focused on credit creation, but it has a dual effect on “Output” and “demand” and yes therefore on “prices” too. The demand side is always immediate but the supply side has always lagged and sometimes uncertain.
As per ET, In two years, our supply side has just reached the level of April 2020. Meanwhile, the money supply has increased, which will stay at that level.
We should not forget the “Original Quantitative theory of money” which states the general price level of goods or services is directly proportional to the amount of money in circulation, or money supply.
I think this is the right time the policymakers should think to pause the ease of monetary policy so that we don’t have to face that level of inflation that the US is facing right now.
More to come. In the meantime, tips and opinions are welcome.
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