Inflation is indeterminate when the supply and demand increase simultaneously... Higher inflation is also due to the lower base effect when the covid struck in 2019... Higher inflation this year would lead to the debase effect next year according to the chain based index... Few people understand percentage when most data is given in the same and have a base or base year to calculate the percentage and negative growth does not mean growth lower than zero, but only lower when compared to the base year or quarter... INDIA had a positive growth during covid, but lower than 2018 the base year....
A higher fiscal deficit during this period of crisis slash lower revenue from oil slash more debt could increase real wages and incomes and demand... It would reduce transport prices across the spectrum and would increase productivity and growth... Lower inflation would increase real GDP...
Raising taxes and ignoring the public's will during the pandemic is against the spirit of democracy... Give some relief to the people not accounting...
The govt is procrastinating decision on fuel prices... It could help (lower prices) and increase real wages and incomes... Increasing productivity requires cost competitiveness and lower prices to increase demand and price and growth expectations to increase spending during crisis...
Even the Fed could not gauge the prices correctly for a long time... All predictions about the prices and interest rate are nothing more than horoscope of the economy due to a variety of exogenous factors and ignorance about the top and bottom of price and growth... Though the central banks actions and the resultant expectations could become self reinforcing... For example, higher borrowing cost and expectations could further reinforce higher prices by lowering supply and lower borrowing cost and expectations could further reinforce lower prices by increasing supply...
The investors shall find relief from the fact that the Fed is reaching its goals of growth and inflation and the bull market could continue as long as prices and growth rate is stable and the Fed would continue the bond buying albeit at slower pace... Any reversal in the stimulus is still far away and possibility is that if the economy diverges from its path of full employment and growth and price stability the Fed could again provide the stimulus...
The main thing is that the Fed could gain ease quantitatively if the recovery is derailed and unemployment increases culminating in slowdown... The Fed would not want to precipitate any prolonged correction which may push it to ease liquidity to increase demand... The stock market investors were encouraged by the prompt action by the Fed after the covid hit in 2019... The Fed could continue providing stimulus in the face of adverse outcomes...
Expectations of outflows and depreciation could be self fulfilling by the way of selling financial assets in the emerging markets, outflows would increase depreciation, too... The emerging market central banks shall sell dollars in order to stabilise the situation and stop outflows... Low prices are important for spending decision coz it increases demand... Lower prices are good, but not lower price expectations coz the latter could be self fulfilling, if everybody expects the same, they would hold demand and increase supply which would further reinforce lower prices and increase volatility and vice versa...
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