Theme: Global Economy| Threat posed by high global inflation, lessons from history

In this episode of State of the Economy Podcast, Prasenjit K Basu, Chief Economist at ICICI Securities, talks to Lokeshwarri SK on the issue of soaring global inflation rates. While the world grappled with high inflation in 2022, particularly with the U.S. CPI reaching 9% and crossing the 10% mark in the EU and UK, Basu points out that such levels of inflation were unheard of in the developed world for the past three decades. Basu identifies the primary culprit as monetary factors, particularly rapid money supply growth in the United States, which surged in the aftermath of the COVID-19 pandemic. This monetary expansion was further exacerbated by substantial fiscal stimulus packages in late 2020 and early 2021, which fueled consumption. Comparing this episode to historical instances of high inflation, Basu mentions that in the early 1980s, the developed world experienced double-digit inflation. He also discusses supply-side constraints, like those caused by the oil price shocks of the 1970s, but emphasises that this time, monetary factors played a more significant role. Basu highlights the importance of central banks monitoring monetary aggregates and acknowledges that central banks have largely shifted their focus from money supply growth in recent years, a mistake in his view. He explains that the rapid money supply growth in the U.S. from 2020 to 2022 was unparalleled in the last 80 years, contributing significantly to the current inflationary episode. As central banks like the U.S. Federal Reserve grapple with inflation well above their targeted rates, they are tightening monetary policy to control it. Basu also notes the impact of fiscal policy, with the U.S. running a significant fiscal deficit, contributing to the inflationary pressure. In conclusion, while the central banks prioritise inflation containment, the impact on economic growth remains a significant concern, especially with fiscal policies adding to the mix. Listen to the podcast!