Inflation - ‘Deflation’ - Inflation

The current phase of low inflation is temporary. With governments across the world pumping trillions of dollars into their economy, we must all be prepared for yet another phase of inflation.

It was just ten months back that we were grappling with mind-boggling double-digit inflation. The price of oil came crashing and so did the rate of inflation. From 13 percent levels, today it is struggling to stay above zero. And the media is full of stories on ‘deflation’ and its after-effects!

Initially, they scared the living daylights out of the common man with their stories on deflation and depression that has hit global economies. Thankfully, those stories seem past us today.

What I am more concerned about is inflation! Yes that’s correct - inflation.

I am no great economist, but I can definitely tell you that with the trillions of dollars being pumped into various economies (in order to bail out these economies by increasing liquidity) fiscal deficits are expected in the region of 12 to 14 percent. My concern stems from the fact that once these monies start reaching the retail consumer, they are bound to fuel inflation. It will be a case of too much money chasing too few goods - the latter being the fallout of the slowdown / recession in global markets.

In the last 12 months, the supply of money through various stimulus packages has grown manifold. Interest rates have eased and are expected to ease further (at least here in India) so that the consumer and businesses start availing loans and increase consumption.

Prices have witnessed a steep drop in order to boost consumption. But the start has to come from the consumer, and his or her desire to start purchasing (all over again). This will fuel demand and will make the manufacturer increase his production level. So the wheel will start rolling once again.

This, in turn, will cause the prices to increase as (in the beginning) there will be more money chasing fewer goods. Hence, inflation will rise from the near-zero levels (0.26% for the week ended March 28, 2009).

Provided crude oil prices (as one of the crucial factors) remain at around $60 levels, my guess is that inflation will claw its way back to 4-5 percent levels by the end of this year. The new government at the Centre will have to manage the fiscal deficit in a very deft manner.