Two episodes of US inflation and responses: Are there any lessons?

The central bank of the United States (US), the Federal Reserve (the Fed) has been on a “war path to fight inflation” since May this year.

- Dr. T. K. Jayaraman

 

The Fed began resorting to steady increases in its policy interest rate from near zero percent in April 2022, first to 1% in May and ultimately to 4% in November. The purpose is to contain rising aggregate demand. It was a delayed response, when inflationary signals were clear in May 2021.

The Fed ignored inflationary signs for more than a year, comforting the nation that they were transient and would vanish soon. The Fed told the nation and the world that the factors responsible for the signs were only transient as they were transitory. After inflicting enormous pain for six months on the rest of the world, including poor developing countries and emerging market economies (EMEs), there are some encouraging signs of falling inflation in the world’s richest nation since November 10. The latest data showed the US monthly inflation for October 2022 was less than the predicted rate of 8.0%. Inflation was 7.7% in October, falling from 8.2% in September, confirming the eagerly awaited declining trend since the tightening began in May 2022.

The current global situation of high inflation is a resultant of easy money policy pursued by central banks led by the Fed for long years with low interest rates for meeting the Great Recession (2008-2009) and then dilly-dallying in regard to normalisation of monetary policy during taper tantrum years of 2013-15; which was followed by three years of return to some kind of recovery; and later by the Covid-19 pandemic and now the ongoing Russia-Ukraine conflict (See article “Stability or Growth”, Business Economics, November, 2022 ).

Impact on developing countries