Academics, theorists and philosophers are always in search of truth that proves to be useful in modeling human theories based on simple assumptions to predict response or outcome of some stimulus, if acted upon, which is the goal of the behavioral economics, a quite novel branch of economics. Expectations have been the one of the concepts that drove a lot of attention in predicting and forecasting the current and future outcome or response. Nonetheless, “expectations are self-fulfilling” which is a universal concept, which applies almost anywhere and everywhere, and especially in psychology and economics. What you expect and what is your action decides the outcome.
Inflation is a problem as long as the price level does not come down... Higher prices and lower prices both are good for either demand or supply, higher prices mean higher demand and lower supply and lower prices mean higher supply and lower demand... The problem enters when people experience and expect or estimate prices (high/low) and increase speculation and investment based on price expectations, higher price expectations would increase demand and lower or delay supply and lower price expectations increase supply and lower or delay demand, which only could maximise returns, though expectations affect investment and consumption decisions today... If they expect higher prices they increase demand which would increase current prices and if they expect lower prices they increase supply which would lower current prices... To control inflation the govt may think like investors or traders... Create strategic reserves when prices are low to increase supply during high inflation...
There is another view in the market, too, except the supply side disruption, that the current inflation is high due to low base a year ago, which is also likely to fade as inflation and growth stabilise... The Fed missed the neutral stance by jumping to the restrictive stance in order to stabilise inflation expectations... Since the objective is to balance on the neutral real interest rate... Otherthings remaining constant, if prices or inflation increase it lowers real interest rate, wages and exchange rate which should increase demand and spending... In this state of affairs, if the Fed increases nominal interest rate it would not let the aforesaid mechanism work - as inflation increases the Fed would hike and the real interest rate would remain same... In real terms the situation would remain same, the real rate would remain same... Nonetheless, if higher inflation increases demand (or lower supply), inflation begets more inflation which could be self-fulfilling...
Probably, there is one more reason for lower inflation expectations, is lower (investment and) employment in construction, because it consumes a lot of unskilled labour which creates demand more than any other sector, tightening leads to higher unemployment and lower inflation and expectations... Lower inflation or price expectations would further delay demand and reinforce lower prices...
Stable inflation and interest rate and expectations are important for financial stability, higher inflation means price of everything, including labour, is increasing, it is a problem when real income doesn't increase... Higher prices mean that demand would be in control and stable interest rate means that supply would not be disrupted... Rate hikes and higher unemployment could further reduce supply and reinforce higher prices... Higher prices could help increase supply and restrict demand, rate hikes could further reinforce higher prices and vice versa...
Economic decision making often involve trade-offs... If the government of INDIA reduces taxes on oil it would help increase spending and taxes elsewhere... Lower interest rates could further increase investment spending and taxes... Though, it depends upon the tax multiplier...Until INDIA provides free food and free education and skills upto the secondary level, it would get stuck in low productivity and income like agriculture... Distribution of labour and income according to the aptitude/skills and specialisation is the goal of the economic policy-making...
Rainy season is still away the govt must protect the coal from water to stabilise future supply to the power sector, it must be stored and transported safely and at lower cost... Coal and electricity demand during rain and lower supply could further reinforce higher prices... The govt must be proactive to control supply/demand and prices... The govt must think like a trader... Lower prices now and higher price expectations could increase investment returns by the rainy season... it would also help increase supply during high prices to increase stability...
Everybody shall invest in index funds or mutual funds having nifty 50 and bse 30 companies, they are the top companies and investors does not need thorough research, they could take advantage of others... Investors shall buy significant correction in corrections... Investment mean three things buy low and sell high buy low sell high and buy low and sell high... Investments need timing...
Russian ambitions are worthless, its economy has flared poorly on diversification of production and exports, its oil exports are going to take a hit as EVs could lower oil demand and exports and prices would return to normal...Back to back Corona (from china) and Russian invasion of Ukraine forces to think of some socialist-communist agenda working to derail the global economy... It must have something to do with the oil prices, the US is a net exporter of oil now... During Corona oil prices hit low which hit the US shale companies and investment in it got down, though oil prices have bounced back sharply since then, but not shale production... Investment in oil is done keeping future or expected prices in the mind, but shale could not catch up...
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