Thousands of miles from the corridors of the Federal Reserve and European Central Bank, a struggle between competing views on inflation is unfolding. Two emerging-market icons are watching prices jump and steering very different courses: Brazil is cracking down, while India prefers to wait and hope the phenomenon flames out on its own.
Which of the two approaches proves most effective will shape the lessons a generation of officials take from the pandemic. Covid-19 has claimed almost 4 million lives worldwide, with Brazil and India among the hardest hit. The deepest economic slump since the Great Depression is being followed by an impressive, if uneven, rebound. Both nations, giants in their respective hemispheres, are part of that upswing. But the recovery, much as it is welcome, brings its own set of challenges. Inflation is chief among them.
At the core of the argument is tension over whether the global spurt in prices is a natural and temporary response to the massive stimulus thrown at last year’s economic implosion, or something more pernicious. While decision-makers have long prioritized inflation-busting over expansion, they’re starting to push back. “Policy support from all sides is required to gain the momentum of growth,” Reserve Bank of India Governor Shaktikanta Das said this month after announcing a big boost to the country’s quantitative easing program.
Mumbai’s stance has the advantage of giving the nascent revival scope to gather steam, as well as constraining politicians who may want to meddle in the central bank’s affairs. The strategy isn’t risk free. Misjudge and inflation will get away from you. Policy makers will then have to eventually raise borrowing costs faster and farther out, possibly inducing a fresh downturn. There will be some hair-raising data along the way: Wholesale prices soared to their highest since 1992 last month while retail inflation powered past the RBI’s 2% to 6% target range.
Brazilian policy makers aren’t nearly so sanguine. The central bank has tightened quickly and with force: The benchmark rate has climbed 225 basis points this year. The latest boost, announced Wednesday, took it to 4.25%. The bank signaled another increase is coming in August. Only Turkey, which has undergone policy upheaval and suffered a purge in its senor ranks, has hiked more among major economies since the start of 2020. (Ankara is thought to be now be laying the ground for a reduction.)
The idea in Brazil is to come down early, leaving less to do later. If you wring inflation from the economy in its infancy, you prove your mettle and make future commitments to price stability more meaningful. The credibility issue is especially pressing, given Latin America’s reputation as a region forever prone to inflation, banking crises and needing assistance from the International Monetary Fund. (Neighboring Argentina seems unable to escape from a cycle of high borrowing followed by default, with a long history of profligate populist leaders.) One arrow in Brazil’s quiver is that the central bank was recently granted formal independence, with an inflation target and a mandate to buttress employment. The bank seems very keen on constraining the former as a way of doing more for the latter.
For all investors’ attentiveness to changes in U.S. payrolls and consumer prices, they might do well to look at how the debate is playing out in emerging markets. Many adopted the tools of the developed world over the past few decades to attract global capital: scheduled meetings, minutes, forecasts, forward guidance and press conferences.
That approach has significance beyond wonkish circles. The durability of economic orthodoxy in far-flung corners of the globe could help determine the prosperity of more than 1.5 billion people. In India and Brazil, lives and livelihoods are both on the line. — Bloomberg
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