Future Inflation Could be Tough to Handle
Managing inflation could become tougher in the decades ahead, speakers at a conference of central bankers have warned
The battle against rising inflation has seen interest rates at their highest levels for a long time as central banks across the world battled rising prices for close to a year now. However, things could get worse in the future due to aging populations, rising trade barriers and the transition to sustainable fuel options.
This was the theme of several research papers presented at a conference of central bankers held in Jackson Hole, Wyoming last week. Speakers at the conference highlighted that prevalence of such trends could further intensify global inflationary pressures that the Federal Reserve and other central banks may find tough to tackle.
Low consumer prices come at a high cost
The speakers at the conference noted that lower-wage production across countries allowed the developed world to enjoy inexpensive goods and kept inflation low. The process, which helped consumer prices stay low, however, came at the cost of taking away several thousand manufacturing jobs in these developed economies.
However, the global economic integration showed signs of slowing down post the pandemic with several large corporations shifting their supply chains away from China and seeking to produce more items within the United States. The case of semiconductors, which is crucial for autos and electronic goods, is a case in point, they noted.
Future investments in cleantech is disruptive
At this juncture, a wholesale shift towards renewable energies that require massive investments could prove disruptive in the immediate future as it could potentially heighten government borrowings and demand for raw materials. If this happens, there could be a fresh pressure on consumer prices, fuelling another bout of inflation.
Supply chain shocks of the future could result from a largely aging population as there is every possibility that the total human resources could dwindle in the future. A similar situation befell the electronic goods industry during the pandemic when China could not fulfill its commitments due to a large swathe of its workforce bearing the brunt of Covid-19.
Commodity prices could head north
Once again, such a scenario could fuel inflationary pressures on the US economy as those of countries across Europe. Former IMF chief and current European Central Bank President Christine Lagarde noted that if higher investment needs come alongside larger supply constraints, there could be price pressures.
More so in the commodities market, and more specifically for metals and minerals that are crucial to green technologies, she said, while adding that such an environment only sets the stage for large relative price shocks than those that the world witnessed before the pandemic shut down economic activities.
RBI governor bats for price stability first
Back home, RBI Governor Shaktikanta Das also underlined the need for price stability as an essential for maintaining economic growth. “Price stability has to be the basis of sustainable growth. Without price stability, any growth which you try to achieve in the short term will only have a short life,” he said while noting that the RBI’s macroeconomic and monetary policy had focused on ensuring stable prices and ensuring flow of credit.
Besides making a conscious effort to bolster systemic resilience and efficiencies through maintaining external stability and a robust forex build up of $600 billion, the RBI hopes to remove market segmentation, facilitate greater access and widen the participation base. He held the view that India’s agriculture, manufacturing, services and technology sectors could provide significant growth opportunities over the next two decades.
An era of India as a global supplier
In fact, Das’s perspective on India’s resilience sits well with how the rest of the world is looking at their economies. Lagarde believes that if central banks only seek to keep consumer prices in check, there is every possibility that the situation could only worsen as production would become harder and costlier – a configuration that central banks desist.
Meanwhile, a paper presented by Laura Alfaro of the Harvard Business School noted that China’s share of US imports fell 5% from 2017 to 2022 as a result of US tariffs and efforts by its companies to seek other sources of manufacturing. These imports came from countries such as Vietnam, India, Mexico and Taiwan.
However, most speakers felt that deglobalization wasn’t a reality yet though Alfaro preferred to termed the trade patterns as a looming Great Reallocation. Of course, on the flip side, using subsidies to bolster local production could result in more inefficient factories resulting in higher costs and a renewed pressure on inflation.
The last word upon the subject came from Ngozi Okonjo-Iweala, director-general of the WTO who said economic fragmentation as seen in the recent past could be painful and it is only global trade that could potentially restrain inflation and reduce poverty.
