SINGAPORE: Inflation is nowadays often on the tip of the tongue of most politicians worldwide, as people everywhere scramble to cope with runaway prices. A number of causes have been blamed for the mounting price hikes. There are the supposed disruptions in food and energy supplies as a partial fallout from the ongoing crisis in Ukraine. There are also the breakages in the global supply chains for critical materials and products amid the lockdowns that are still ongoing during the undulating coronavirus pandemic. So, when demand outstrips supply, prices rise. At least that was the theory. But I suspect there are also the opportunistically surging price adjustments made by some unscrupulous merchants to reap more profits for themselves at the expense of the consumers at large, who are already hard hit by the economic slowdown attendant to the pandemic.
In the United States, depending on what sort of scale of inflationary measurement one uses, the numbers could vary from 5 percent to 10 percent. And these inflationary figures really worried the US Federal Reserve (the Fed, the equivalent of America's central bank). The Fed would typically like to keep the US inflation to be around 2 percent (as vowed again recently by its chairman). This is because it is reckoned that from experience inflation numbers higher than that would eat into consumers' disposable income, in effect dampen their desire and ability to spend, and would thus slow down the economy and degrade their quality of life. At least that was the painful experience from the 1970s, when the Middle East oil embargo sparked a global energy crisis and ensuing heightened inflation. Conversely, zero inflation or even deflation (continuous overall price decrease) would also lead to economic slowdown, as merchants become dispirited by their dwindling profit margins, and would thus hesitate to maintain their businesses as going concerns, much less expanding their business ventures. So, a low but positive inflationary percentage target has become the economic holy grail of the Fed.
But if my own suspicion of the “real” cause of the recent bouts of inflation holds true, the inflation could also be said to be partly of the Fed's own making, or at least either its failure or refusal to acknowledge the extent of human profit-seeking nature. For since before the onset of the pandemic, the Fed had engaged in both quantitative easing (a euphemism for money-printing, often in the indirect method of the Fed buying back US Treasury debt instruments from the open market, thus in effect disbursing cash into the market) as well as lowering of its famed federal funds rate (the interest rate with which it charges short-term lending to major financial institutions), at one point — and not so long ago — to as low as zero percentage. These were drastic measures aimed to resuscitate the declining economic performance. The open markets were awash with “cheap” money. But a large portion of this “cheap” or “hot” money did not end up ramping up or expanding “real” business production. Instead, it flowed into various financial markets to try to make quick and often “virtual” profits. Some “hot” money arrived on our shores as well, as it searched for supposedly ever higher returns in emerging markets such as those in major Southeast Asian economies. Thus the perverse contrast between the bullish financial markets in many major economies versus their rather bearish “real” economic performance over the last few years. And viewing the swells of “hot” money around, many merchants of course take advantage of this opportunity to rake in more profits by raising prices. And that, I contend, is partly to be blamed for the current inflationary trend. Of course, the Fed is not solely responsible for flooding the markets with “hot” money. Despite their erstwhile opposing ideological positions, the Donald Trump and Joe Biden administrations both enacted humongous economic stimulus packages over the past two years, with trillions of dollars having been disbursed, and a lot of this money would again end up in the upward inflationary spin.
And so it was that when inflation surged in recent months, the Fed undertook what amounted to drastic measures to try to tame down the unruly inflationary beast. The government bonds buyback was largely stopped, and the interest rate was raised consecutively, most recently in two 0.75 percentage hikes. The idea was to make it at once more attractive for consumers to deposit their disposable income in financial institutions rather than spending the sum, and also make it more costly for merchants and consumers alike to borrow to spend. So far this has frankly not worked, as inflation is still going through the roof in the US and beyond. And such raising of interest rate by the Fed, just as with its lowering counterparts, also has perhaps unintended socioeconomic side effects or casualties. For one, lower spending desire by consumers and higher borrowing costs for businesses and consumers alike would likely lead to a slowing economy, something that is certainly undesirable during this supposed recovery phase of not just the US but also the global economy. Besides, a higher Fed rate would trickle down to higher rates for house mortgages and vehicular hire-purchase repayments, something that is sure to further dent the already shrinking wallets of the working population. In other words, there is no magic formula for governments, and especially the Fed, when tinkering with the various levers of economic performance. When one economic indicator is positive, it would often inevitably trigger a negative indicator, and vice versa. Talk of economic recession has already set in, again not just in the US, but across the world that is still reeling from the aftershocks of the pandemic.
And so wither the much glorified emerging markets? Well, one thing for sure, we will have to similarly raise our interest rates, almost in tandem with the Fed. Not only are the inflationary figures in most of our jurisdictions mounting, but we may even suffer serious capital flight if we do not raise our interest rates, for “hot” money from abroad, and even our respective domestic capitals, may seek the relatively more lucrative safe havens of higher US interest rate to park themselves. But when we do raise our interest rates, the working folks who have to fork out monthly repayments as well as the small and medium enterprises that have become increasingly prone to borrowing to tide themselves over, will suffer greatly. Such is the unfair plight of developing countries.