The World Battles Inflation

When an economy is growing rapidly, inflation can be “tolerated”. Unfortunately, most other economies are staring at high inflation and falling growth

For the second successive time in a short duration, the Federal Reserve Bank of the United States raised interest rates by 75 basis points. Since January 2022, this is the fourth time that the Fed has raised interest rates. The reason is simple: against the target rate of 2%, inflation in the United States crossed 9% in June-the highest in 40 years. With both food and fuel prices soaring, poor Americans are in dire straits and the approval ratings of President Joe Biden has crashed to an all time low. Young Americans have never witnessed gasoline queues and no stocks of basic food staples in super markets. It is a very unnerving experience for them.   That is because the US has been hit by a double whammy of rising inflation and falling GDP growth rates-a development last seen in the country in the 1970s and branded as stagflation. According to the International Monetary Fund, GDP growth in the US will decline to 2.3% this year compared to 5.7% in the previous year.

But why single out the United States. Across the Atlantic, the UK is also struggling with unusually high rates of inflation. According to official data, the rate of inflation in the month of June in the country was recorded at 9.4%. It is a similar story across Europe as the Russian invasion of Ukraine has badly disrupted energy and food supply chains. According to the latest assessment by the IMF, inflation is projected to be 6.6% in advanced economies and 9.5% in emerging & developing economies this year. The accompanying chat shows how inflation has become a global phenomenon. Surprisingly, contrary to the IMF forecast, the inflation rate in an emerging economy like India, at 7.04%, is far lower than the rates witnessed in advanced economies like the US and the UK. Indonesia, another emerging economy, had one of the lowest inflation rates at 4.35% in June, 2022. Of course, Brazil and South Africa have been witnessing significantly higher rates of inflation. The chart does not include countries like Turkey where the current rate of inflation is an astounding 78.6% or India’s neighbours Sri Lanka and Pakistan where inflation seems out of control.

As far as India is concerned, there are very strong indications that the rate of consumer inflation has already peaked. Retail inflation was at 7.8% in May and declined to 7.04% by the end of June. The Reserve Bank of India estimates that overall retail inflation for the current year as a whole would be about 6.8%. That is still far higher than the ideal RBI target of 4% and the danger level of 6%. Perhaps the silver lining for India is the fact that unlike most other economies, GDP growth rate continues to be robust. In fact, the IMF report (as analysed in an India Tracker story on July 27) forecast that India will be the fastest growing major economy in the world in the near future. When an economy s growing rapidly, inflation can be “tolerated”. Unfortunately, most other economies are staring at high inflation and falling growth.