Immaculate Disinflation and Its Challenges in India and Globally

 Dear Readers,

The term "immaculate disinflation" has gained significant attention lately, especially as global inflation rates start to come down. Economist Paul Krugman coined the term, which refers to disinflation without an increase in unemployment. However, disinflation has not been entirely painless for everyone, as some beleaguered regional banks in the US face a slow run on their deposits.

In India, retail inflation for April was 4.7%, the lowest since October 2021, due mainly to the base effect. However, month-on-month retail inflation increased from 0.23% in March to 0.51% in April, indicating that price pressures continue, despite the year-on-year optics. Similarly, the CMIE Core index, which excludes food, fuel, light, and fuel for vehicles, fell from 6.2% in March to 5.9% in April, but went up month-on-month from 0.27% to 0.58%, indicating that companies still have pricing power.

The Index of Industrial Production (IIP) numbers indicate that disinflation has not been painless in India. Industrial production growth was just 1.14% in March, well below expectations and at variance with the PMI data. Consumer non-durables or staples shrank by 3.1% from a year ago, while consumer discretionary production fell by 8.4%. However, there are reasons for optimism, such as relatively strong overall growth, aided by lower commodity prices, and the prospect of a revival in the capex cycle.

Globally, there is a two-speed economy, with contrasting trends in the manufacturing and services sectors. While the pace of inflation has eased in Manufacturing, it has accelerated in the Services sector. However, investors seem nervous despite the immaculate disinflation, and markets are likely to get less immaculate over time if central banks do not cut rates.

There is a belief that the US markets will be supported by the Fed's possible rate cut in September, which will boost growth. India has seen a rally in its local equity market and foreign portfolio inflows due to the fall in inflation. There are also hopes that lower inflation will lead to the revival of rural demand, boosting FMCG stocks.

While there are benefits to cooling commodity prices, such as the boost in volumes for Hero Moto Corp and the growth for HG Infra Engineering due to the government's infrastructure push, there is a flip side, as seen in Coal India's results. High-cost inventory, among other woes, took a toll on UPL. The exuberance on PSU banks may also be dented by expected credit loss provisioning.

Overall, economists have pooh-poohed the idea of immaculate disinflation, as all large policy-induced disinflations in four advanced economies since 1950 were associated with recessions. In conclusion, while immaculate disinflation has benefited some, it is not a guaranteed success, and challenges remain in India and globally.

Highlights:

·        The term "immaculate disinflation" refers to a situation in which inflation decreases without causing a recession or significant economic slowdown.

·        India has experienced a period of immaculate disinflation in recent years, with inflation dropping from over 10% in 2013 to below 4% in 2019.

·        The global economy has also experienced a period of low inflation in recent years, despite unprecedented monetary stimulus from central banks.

·        There are several factors that have contributed to this global trend, including technological advancements, globalization, and demographic changes.

·        However, there are also challenges associated with low inflation, such as the risk of deflation, which can lead to decreased consumer spending and economic stagnation.

·        Central banks around the world are grappling with these challenges and trying to find ways to stimulate inflation without causing economic instability.

·        In India, the central bank has used a variety of tools, such as interest rate cuts and open market operations, to manage inflation and support economic growth.

·        Going forward, it will be important for policymakers to strike a balance between maintaining low inflation and supporting economic growth and stability.

Thank you for reading.