
Today’s world war on inflation is yielding no winners

Summary
- Price instability is a global battle that has had no victors so far and India’s own record isn’t boast-worthy
Another month, another suspenseful inflation number. India’s 6.8% rise in the Consumer Price Index (CPI) on Tuesday was lower than expected because of slower-rising vegetable prices that however still jumped 26%. The US’s August inflation number released on Wednesday, meanwhile, disrupted the cheery view that the US economy is managing to avoid a recession while inflation does the Federal Reserve’s bidding without needing more interest rate hikes. For stock markets around the world relying on this benign scenario to spin out soft landing narratives and justify higher share prices, we are at a critical juncture. The witty UBS chief strategist Bhanu Baweja has called this “Peak Goldilocks."
Among the bears threatening to spoil this fairytale are Vladimir Putin and Mohammed bin Salman. Russia and Saudi Arabia’s supply cuts have contributed to oil prices heading north of $90 per barrel. The problem for central bankers from the US Federal Reserve to Reserve Bank of India (RBI) is that managing inflation has become a bit like keeping an umbrella handy for extreme weather events. The stress points keep moving around: one year, it is a shortage of containers as the US hoovered up consumer goods, the next it’s a semiconductor-chip shortage that affected auto production globally. Now, it is global oil prices, while in India a bizarre relay-race of rising vegetable, edible oil and cereal prices, seemingly jumping from one category to another, has made inflation a subject for discussion almost as pervasive as politics.
It is significant that US core prices are expected to have been tame in August because used-car prices have come down by double-digit levels. The trouble with inflation is that when you have had it at elevated levels for a couple of years, so-called inflationary expectations become entrenched and inevitably spread to wages. This week is doubly significant in the US because the United Auto Workers union may decide to strike to push its case for higher wages and almost French-styled lower working hours per week. The UAW is asking for a 40% wage boost over four years and cost-of-living increases as well as better pensions. If this wasn’t all rather a lot to be putting on the negotiation table, the UAW is asking for a shortened 32-hour workweek, down from 40. Influenced by work-life balance discussions that have come to the fore in the US since the pandemic, many service workers are opting not to go back into the workforce or demanding fewer work hours, which cumulatively pushes up labour shortages and wages. The most dramatic demonstration of union power coming back in the developed world would be if the almost 150,000-strong UAW elects to go on strike this week, but we are already seeing a feistier workforce in rolling strikes across the UK since last year and protests in France. The National Health Service in the UK has seen strikes repeatedly, which once would have seemed like blasphemy. Junior doctors are going on strike for three to four days every month since March. They are demanding a 35% salary increase to make up a “full pay restoration" to the loss in value of their salaries by more than a quarter since 2008.
Both the UAW and NHS offer a very vivid demonstration of how inflation expectations can become the firewood for strike actions after a few years of painfully adjusting to higher prices. In India, by contrast, unions look subdued, in large part because so much work is informal, or, in the case of so many micro businesses, in effect entrepreneurial self-exploitation to keep hunger at bay. But this week in Bengaluru, the digital capital of the world, thousands of auto drivers and app aggregator drivers struck work with such a long list of demands that these seemed like a G20 communique in itself. Riding in the back of taxis, I tried to understand some of the issues in the days before the strike. These ranged from resentment that in our male chauvinist world, the Karnataka government has disrupted the natural order of things by giving women free bus rides, but also more justifiable anger against the huge commissions that companies like Ola and Uber extract from drivers. Expect to see more such protests, especially since price rises are concentrated in food items.
The RBI’s task is made more difficult by the fact that higher interest rates appear to have little effect on food price increases, which often reflect our relative lack of cold chain storage facilities for vegetables and the huge amounts of vegetables and fruits wasted as a result. That challenge is being made worse this year by extreme weather events coming bunched together more closely than ever before. Erratic rainfall played a part in the huge tomato price spikes recently and is now set to affect edible oil production with August being India’s driest month in a century. According to a projection from a US firm quoted in Mint this week, lower rainfall could affect the quality of the soya crop and result in a drop in Indian production by almost a quarter. The country finds itself extremely vulnerable to the negative effects of climate change, not least because our agriculture sector is such a laggard by global standards. Oilseed production productivity is half the global average, for instance.
Last year’s G20 president, Indonesia, saw its CPI rise by just 3.3% in August, by contrast, and Brazil, which will take on that mantle, saw inflation at 4.6%. One must be accustomed to fairytales to believe India’s inflation management (and agriculture) is a model for the rest of the G20.
Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.