Inflation, interest rate and the economic policy making...

The short run outlook for the Indian Economy... which can change the medium to the long run expectations on the economy that it would be in equilibrium, full investment, full employment and full supply and lower prices to increase real incomes and demand which would also increase savings and lower nominal interest rates and increase investment leading to further increase in supply, lower prices and increase real incomes and demand and growth and expectations.... instead of inflation and inflation expectations....  on the assumption that money supply increases demand and inflation, but that depends on full employment and the utilization of the excess capacity... The unemployment rate and the production in the economy and the foreign supply would decide that prices or inflation would rise (or not)... The global economy growth has not yet actualized its potential growth which points that there could be much unemployment and scope to increase production/supply demand and growth, in INDIA, too... in the face of the absence of the data on the unemployment and demand for skills which could lower pressure on the price level by increasing production and productivity.... and lower medium to long run prices and price expectations and increase demand supply and lower unemployment and increase investment and growth and expectations.........,

Nonetheless, now that, higher inflation has increased the chance of bottom out of the rate cut cycle which should reduce spending and increase the excess capacity, because of interest rate hike expectations. The inflation targeting in, INDIA too, has given less space to the price adjustments to increase supply/production and more profits and incomes and more demand and growth expectations. When people expect higher rates in the short run they would borrow and invest less which would also lower the medium to long run spending and expectations.

The US was the first to use inflation targeting framework to kick-off rising price and price expectations during recession to induce supply and reduce unemployment, which forget that higher prices could further increase supply and reduce unemployment and increase demand and growth expectations which reduced the speed of adjustment in the market or the economy through the price level.

Interest cost inflation when wage cost inflation is increasing would make the cost inflation self fulfilling and would make lose competitiveness and demand... At one place wage cost is expected to go up, which may strengthen the case of inflation and rate hikes... But, does it seem wise to increase capital cost when wage cost is also expected to rise and that is likely to reduce investment demand and spending due to higher nominal interest rate and lower real rates due to higher wage inflation (?) and, consumption demand and spending, too, due to lower real wages because of higher interest cost inflation and higher price level... In order to escape too much low demand due to higher interest and wage cost, it looks promising to offset increasing wage cost with lower interest cost to keep the demand supply prices unemployment and growth and expectations, stable....

It was later also adopted by Japan, then in INDIA, but failed to give the desired results due to less scope for higher supply and lower unemployment and excess capacity and achieve the potential growth rate and the warranted or projected growth rate.

Higher Sales Tax in Japan might lower real wages, incomes, salaries and profits when inflation has a downward pressure.... it would further restrict demand and prices leading to lower inflation which might aggravate to problem of lower aggregate demand and the general price level.... Inflation and inflation expectations after full employment, when prices are low could mean higher real wages commensurate with productivity, the revenue-per-labour and revenue per skills.... The real interest rate in Japan is negative to create demand, supply and inflation and increase nominal interest and real interest rate and expectations to create inflation expectation to increase spending, growth and inflation and expectations, but the economic policies might be redirected to lower inflation and inflation expectations, which would also help increase real - wages, interest rate and domestic and foreign currency exchange rate and higher domestic and foreign demand and growth and growth expectations....

The evidence from the last UPA government's management of the demand through higher public spending resulted in higher inflation and depreciation which increased exports, but killed the domestic economy through higher nominal interest rate or lower real interest rate and savings and lower real wages which also restricted imports....