Inflation – it is everywhere – and its consequences

(1) So, it is not just a developing world problem. Short-termism was perhaps imported from the West?!

He and other farmers say drought has been exacerbated by California’s lack of investment in water storage infrastructure over the last 40 years. [Link]

(2) It is because of this:

While droughts are common in California, this year’s is much hotter and drier than others, evaporating water more quickly from the reservoirs and the sparse Sierra Nevada snowpack that feeds them. The state’s more than 1,500 reservoirs are 50% lower than they should be this time of year, according to Jay Lund, co-director of the Center for Watershed Sciences at the University of California-Davis. [Link]. Lots of pictures in the article.

(3) In theory (ok, it is a joke), drought should make wood dry and available plenty as trees turn into wood. But, this article says home-building has never been more expensive in the US:

From lumber to paint to concrete, the cost of almost every single item that goes into building a house in the U.S. is soaring. In some cases, the price increases have topped 100% since the pandemic began.

There are any number of factors at play—from rock-bottom mortgage rates to city dwellers’ rush to the suburbs to shortages of materials—but the simplest explanation is that there is just too much demand for builders and their suppliers to handle. All of this makes housing an extreme manifestation of the inflationary pressures percolating through the booming U.S. economy. [Link]

But, clearly, there is inflation in the prices of materials used in home-building but also in the prices of homes themselves. That is, prices are passed on. The Bloomberg article above has a nice graphic on how the price of a home to the buyer has gone up by 61% since 2019, just two years. This is worse than the 2006-08 bubble.

The Case-Shiller Home Price index confirms the story:

Source: JS Blokland

This article in Wall Street Journal is well written. It is a story about small-town buyers coming home crying because their bids are not attractive enough to the sellers. It is crazy. The story manages to convey the effect rather well that the bubble is far bigger than it was in 2006-08.

(4) As in 2006-08, the bubble has gone global this time too, for at least two reasons. The pandemic is global so all countries have loosened their purse strings – monetary and fiscal. Two, the accommodative US monetary policy propels all countries towards an accommodative stance lest their currencies appreciate too much. That is the problem in crowning one currency as the global reserve and transaction currency and when that country’s central bank does not follow any ‘rules of the game’ but only ‘rules of the whim’.

This Bloomberg article gives a chart of the top fifteen countries with higher prices. The numbers are too small, considering the article in (3) above shows a typical home price having risen by 61% in America. The chart in this article shows US housing price growth of 13%. Perhaps, it is just for one quarter – 1Q2021.

Here is a Reuters story on house price inflation in Australia as well. Well, the RBA is not interested in doing anything about it.

(5) The wicked universe is now showering on the world the problem of cyber attacks, even as Taiwan’s drought appears to have relented:

Meatpacker JBS SA was hit by a ransomware attack that took a big chunk of U.S. beef-and-pork processing offline, sending buyers scrambling for alternatives and raising pressure on meat supplies.

The attack ratcheted up pressure on a food-supply chain already under strain from labor shortages, production constraints and high transportation costs. [Link]

(6) The drought in Taiwan may have relented, but with droughts in California and reported in Brazil, it is no surprise that food prices are at a decade high.

A United Nations gauge of world food costs climbed for a 12th straight month in May, its longest stretch in a decade. The continued advance risks accelerating broader inflation, complicating central banks efforts to provide more stimulus.

Drought in key Brazilian growing regions is crippling crops from corn to coffee, and vegetable oil production growth has slowed in Southeast Asia. That’s boosting costs for livestock producers and risks further straining global grain stockpiles that have been depleted by soaring Chinese demand. The surge has stirred memories of 2008 and 2011, when price spikes led to food riots in more than 30 nations…..

…..The prolonged gains across the staple commodities are trickling through to store shelves, with countries from Kenya to Mexico reporting higher food costs. The pain could be particularly pronounced in some of the poorest import-dependent nations, which have limited purchasing power and social safety nets as they grapple with the pandemic. [Link]

Separately, this gets interesting. Was it just a massive famine in China that led to this or was it geo-strategic?:

Gains in the past year have been fueled by China’s “unpredictably huge” purchases of foreign grain, and world reserves could hold relatively flat in the coming season, Abbassian said. [Link]

With global food prices rising, then the transmission to India’s food prices will be there, if I recall from a IMF ‘Selected Issues’ paper/note published in 2014 or in 2015. Then, it would spill over into the overall inflation rate. Real rates in India will be steeply negative. No point in further cutting rates or lowering small savings interest rates, in this milieu.

Ok, I found it. It was in ‘Selected Issues’ for India released in March 2016 by the Fund:

Moreover, as MSPs and domestic wholesale prices of cereals are influenced by and move in line with international prices, the global market price will remain important in defining Indian cereal prices in the long-term. [Link]

By definition, the impact of inflation on the incomes of informal workers and sectors are not easily tracked because they are informal. They are only captured in surveys. If the private sector does these surveys and if the findings are adverse, they are dubbed ‘biased’. The government itself has withheld release of the 75th round of the NSS Household Consumption Expenditure Survey because the findings did not read well. Now, the planned conduct of the surveys in 2020-21 and 2021-22 is unlikely to happen due to the circumstances. Then, there is no feedback. In these times, it could be dangerous.

(7) Predictably, this article talks of more cyber attacks. Yes, we had the colonial oil pipeline, JBS and in India, we learnt that AIR INDIA’s ticket booking system was compromised. More attacks are predicted now. It could be a prediction overcompensation. But, who knows? I am beginning to read ‘Meltdown’, the book that came out in 2018. Complex and tight systems (no slack) – when they fail, the failure cascades quickly.

(8) With ships avoiding a port in China because of an outbreak of the Covid virus there, supply chains are going to get longer and shipments to America and Europe will be delayed. Higher prices, I guess, is the outcome, at least temporarily. But, do prices come down as quickly as they go up, especially when far too much money is chasing all sorts of goods and services. Monetary theory of inflation might have failed the empirical test in the last three decades or so but when tested with a massive injection of money on a global scale, it might still have teeth.

(9) A new term has been coined as another form in which inflation shows up. Apparently, it is called shrinkflation where sizes and measures of goods are lowered instead of prices rising. With droughts and food prices at 10-year highs, it is easier and also ‘sensible’ to shrink quantities per package, as well. Sensible for sellers, that is.

The way it shows up is in extracting more spending out of wallets without you noticing. Measured inflation won’t rise but household budgets would bleed more money. This is also a behavioural flaw in human nature which sellers are exploiting. We inspect the ticker and think that we are doing due diligence but quantity and price are two sides of the same coin.

Since the government is still flooding the economy with more freebies and the central bank is bankrolling the government in its money-shower, what is there to worry about, really?

(10) Let us switch gears and talk about China or the US dollar. Well, are they two sides of the same coin? After all, what we are learning with respect to Covid is that the collaboration between both the countries is what has reduced the rest of us to sorry and sorrowful spectators. That is a different story.

This is a different virus and a different contagion:

A selloff in China Huarong Asset Management Co.’s bonds is once again broadening to the nation’s other major bad-debt managers, raising the stakes for Beijing as it weighs an industry overhaul…. The three Huarong peers have combined liabilities of 2.9 trillion yuan ($454 billion), including $28 billion of outstanding dollar bonds, according to their latest financial statements and data compiled by Bloomberg. [Link]

(11) But, at the same time, China, for trade purposes, does not want its currency becoming too strong. It is restricting dollar supply onshore by raising reserve requirements on foreign currency deposits. That is, making less dollars available to be lent out, onshore. So, dollars have to be purchased. That, all else being equal, pushes the dollar higher and yuan weaker. So goes the logic.

(12) In the meantime, peers of Huarong Asset Management are wondering where they would find the dollars. That is the problem with the balance-sheet and the income effects of a weak currency. The belief is that it helps the latter but invariably, it hurts the former.

(13) While China wants the dollar to strengthen as per (5) above but not as per (6) above (if you ask the firms, that is), Russia is symbolically declaring loss of confidence in the dollar. Geopolitics apart, cannot blame them though. Russian National Wealth Fund will get rid of all its US dollars. Interesting times.

Let us get back to the discussion on inflation.

(14) Central bankers do not seem to agree on whether there is an inflation problem in their jurisdictions and, if so, ow to handle it. Should that be news? But, well, are they disagreeing? Euro-area and Japan think that they are stuck in low-inflation or deflationary environment and the Fed thinks that inflation is transitory. So, they are agreeing! [Link]

(15) But, data must be somewhat annoying to the central banks:

The Organization for Economic Cooperation and Development Wednesday said consumer prices in its 36 members, which are mostly rich countries, were 3.3% higher than in April 2020. That was the largest increase since October 2008.

Across the Group of 20 leading economies, which account for about four-fifths of global economic activity, the annual rate of inflation rose to 3.8% from 3.1% in March, reaching its highest level in over a year. [Link]

(16) Yes, ultimately, this is the key to central banks taking inflation seriously. That has been my refrain. Until it is the case, they will continue to do jawboning to keep inflation expectations in check without actually tightening or tapering (this is not such a big barrier – they can do so).

“Many people are making the comparison with the 1970s, but the world is very different,” said Laurence Boone, the OECD’s chief economist. “We’re more open, we don’t have the same level of unionization and indexation, and the demographics are different.” [Link]

Well, central banks and governments are indeed pushing the labour-cost theory of inflation to its limit. With such expansion of government budgets and central bank balance sheets, they may breathe life – or will be forced to, – by political economy forces – into labour bargaining power and wage increases. Relationships in economics are non-linear. Money supply may have ceased to matter for inflation or so we think but it might have ceased to matter, within certain ranges. If one keeps pushing the limit, then we might discover that it has potency.

Let us see if wages in America will remain restrained after stimulus cheques stop coming.

(17) Chris Giles’ article in FT is a good read. It explores the theme of inflation. In Dec. 1964, the Federal Reserve in its monetary policy meeting concluded that inflation would not be a serious concern. They were wrong for seventeen years. Roger Bootle, formerly with HSBC Bank, wrote ‘The death of inflation’. Now, he is worried that it is reviving. The article sets out the theme of the risk of being complacent on inflation. The data and the charts are good. [Link]

(18) Germans are worried about inflation since their May inflation rate at 2.4% is the highest in two years. They are worried about the social costs of higher inflation. Some Germans think that it foments extreme nationalism and xenophobia! But, ECB is indifferent right now.

What is the price of asset price and and goods-and-service price inflation? Turn Left.

(19) Where prices rise and incomes are squeezed, it is but a matter of time before politics and policies turn towards distribution rather than production. When growth dries up and distribution has reached its limits, grievances take on a life of their own.

After Chile voted to give the Left and Far-Left parties a hand in re-writing the Constitution, it is Peru’s turn to worry about a Left turn in the country. Left-dictators are no better, or may be, worse than Right-dictators when it comes to civil liberties and expropriation of national wealth:

Described by many observers as a choice between the lesser of two evils, the second-round run-off election pits Pedro Castillo, a rural primary school teacher turned hard-left populist, against Keiko Fujimori, the widely disliked scion of an authoritarian president who ruled in the 1990s. Panic has seized the Peruvian elite at the prospect of a win by Castillo, whose political party Free Peru is led by a Marxist advocating widespread nationalisation, higher taxes, a new “people’s constitution” and import substitution policies in the world’s number two copper producer. [Link]

(20) Greg Ip of WSJ weighs in on the same issue. The Peru elections are due on Sunday. There is also a Bill under consideration, apparently, in Mexico that will give more powers to its Left-leaning President. When growth falters, the incumbent will lean Left or Left-Parties will gain the upper hand. It has implications for India too in 2022 or in the coming years, in general. So, all the more reason for the corporate leadership or business elites to anticipate and forestall this, by being fair, reasonable and generous. Hence, my two columns are worth re-reading. They are here and here.

Finally, articles and statements such as the one linked below do grate because it was both China and the United States that created this pandemic, based on recent evidence, and they both have their economies exceeding their pre-pandemic level already or real soon whereas there is deep uncertainty in India. What a logic and what an outcome?! But, if the article in Wall Street Journal sounds like it is too good to be true, well, it is so. It is unlikely to last. This is unsustainable.

When Covid-19 pandemic restrictions sent the U.S. economy into free fall last spring, economists and policy makers worried it would take years for workers and businesses to heal. They now expect the economy’s size to surpass pre-pandemic levels this quarter. Analysts project that by the end of this year gross domestic product will reach the path it was projected to follow had the pandemic never happened, and then exceed it, at least temporarily. [Link]

Here is one reason why:

On a month-to-month basis, real wages have fallen in three of the past four months, though they are up from two years ago.

However measured, the recent drop in real wages points to a risk should these trends be sustained. Government efforts to boost economic activity and hiring — through low interest rates and trillions of dollars in new federal spending — could widen inequality if they lead to continued outsize increases in the cost of living. [Link]

The farm bills

Thanks to journalist-friend Seetha Parthasarathy in Delhi, I read this article yesterday. It is useful, for sure. Some extracts below:

In the current APMC Bypass bill, there is no obvious mechanism by which a single national market will emerge. In general, they lack a transparent recording of transactions and a credible regulatory architecture.

The absence of data is a serious obstacle towards efforts to ensure contestability and competition among buyers, which are the purported goals of the APMC Bypass bill.

Unlike the APMC Bypass bill, the contract farming legislation has a longer history of extensive consultations with stakeholders. Yet, bewilderingly, the 2020 bill seems to have broken with the past by abandoning the 2018 proposed model contract farming act in favour of a national legislation. 

If on the other hand, the APMCs decline in importance and influence, and cease to offer a reference price, then what replaces the APMC as the source of price signals? 

Another notable weakness is the dispute resolution mechanism. It is developed at length both in the bills and in the rules, but it is weak at best putting the onus virtually entirely on the farmers.

For this group, it is unlikely that these bills lead to an expansion in potential buyers. The benefits of competition among buyers, if at all, would therefore not be widespread, instead benefiting those farmers who have strong locational and competitive advantages.  

My own research on contract farming suggests that where multiple firms contract for produce in the same village, it is hard for agribusinesses to short-change the farmers. 

This is not to dismiss the potentially large benefits that private firms can deliver to the farmer, especially in the context of weak public extension systems, but it is important that these claims are not overstated. 

I had just pasted above some extracts. I did not come away entirely unconvinced of the ‘lack of purpose or teeth’ in the three farm bills. If, as the author says, a good deal is happening already in the direction that the Bills intend, then there is really nothing to protest, isn’t it? It only cements ‘on-the-ground’ trends.

Further, there is often a trade-off between waiting to cross all the ‘T’s and dot the ‘I’s and getting something done on time and then fine-tuning them as evidence comes up. We would not be able to anticipate all the consequences – good and bad – ex-ante. But, we should be open to corrections.

Of course, to the extent that there is model legislation or previous Parliamentary Committee recommendations and reports and if they were valid, they do need to be considered. Indeed, there has to be a framework/process for drafting of legislation. Some boxes have to be checked – comments on previous versions, parliamentary standing committee reports, consultations with states that are most likely affected (for good or bad). More importantly, there should be identification of potential losers, anticipation of their protests and hence steps for mitigation to be included before a proposed legislation is brought to the Cabinet for approval before being tabled in the Lok Sabha.

That is the point I make in today’s column in Mint. Purpose, process and politics matter for policies.

The following two points seem contradictory:

At the same time, as discussed earlier, given the small size of farm holdings, it is extremely challenging and expensive for private enterprises, especially small enterprises, to directly engage with farmers, especially across states with payments within the time period stipulated in the bills.

Here was an opportunity to chart out a creative growth trajectory for this sector that avoids the pitfalls of models followed elsewhere in the developed world, that result in consolidation not just of agribusinesses but also of farms.

Given point (1), how can consolidation be a bane? In fact, I would say that consolidation is indeed needed not so much for efficiency gains for farm output but also for reducing or eliminating opportunity costs for farmers who are toiling in and with inherently unviable sizes. The fragmented nature of farm-holdings does ensure that most government schemes only favour a few, as I wrote today:

Given that a vast majority of landholdings is small and large holdings are concentrated, a marketable surplus will be available only with few farmers, and hence it is entirely plausible that MSPs serve only a few, notwithstanding ‘explanations’ to the contrary. If not 5.8% of agricultural households, as was the impression one formed on reading the Shantakumar Committee report, even if it serves 20% of them in the aggregate, it is still a small fraction of all agricultural households in the country.

Of course, the same bug could affect trade with the private sector. That is why consolidation is needed. That is why Farmer Producers’ Organisations must be an important part of the solution to the synergies to be gained in farmers trading with the private sector.

At the beginning of the article, the author writes that it is not clear how these legislations would automatically pave the way for a market to emerge spontaneously. Well, that is the nature of things, isn’t it? The government simply steps out of the way and then human ingenuity takes over. It will take time.

Where the author gets my attention is with respect to two issues: no regulatory mechanism has been thought of and, two, there is no data collection. Both are important. Of course, the author also notes that an industrialist told her that they would never sue farmers. It just is bad publicity for them.

The author writes:

… even as large efficiency gains are made along the supply chain with increasingly sophisticated technologies and large-scale enterprises, the extent of state support to farmers in these countries has been increasing. 

They are ahead of the curve than India; their problems and the reasons for increased state support are different; in time, we may get there; but we have the time and scope to ride the ascending part of the curve first before we arrive at the same point they are in, needing more state support. At that stage, I hope the state will also have the ability and the capacity to provide that support, in India.

Decisions to ban the export of onions …

I agree with that. Knee-jerk export bans and imports are entirely to be avoided if there is any meaning to empowering farmers.

In the meantime, I came across these stories from 2008 when farmers in Punjab were protesting for flexibility to sell their goods to private buyers! There were also hesitant efforts in that direction!

Some extracts from the first link above:

FCI officials feel that a lot of wheat stock in Punjab and Haryana is not brought to grain markets and is sold to private parties through illegal channels. Because of this practice, Punjab suffered a loss of Rs 227 crore during the last procurement season and Haryana of Rs 245 crore….

….The FCI has set up cellos at Kaithal and Moga of 2 lakh tonne capacity each to allow farmers direct sale of wheat. With this, farmers will get at least Rs 25 per quintal more because they will have not to pay commission to arhtiyas. Though the Punjab government was told to declare direct markets by the FCI several years ago, it was avoiding the process as it did not want to annoy the arhtiyas.

This is from the second link above:

….Farmers, however, disagree saying the reality is vastly different from what is being projected. According to Bharti Kisan Union (Punjab) president Balbir Singh Rajewal, no corporate will be able to make any major purchase because they have been “instructed verbally by the government to keep away from mandis.”

“No corporate will be buying, at least on large-scale. This happened last year as well. It is the farmer who will suffer because of unreasonable MSP set by the government along with such control measures,” Ludhiana-based farmer Amarjit Singh rues.

Dr. Ashok Gulati’s piece in ‘Indian Express’ yesterday was timely and the message was good. Farmers in Punjab are, by and large, pampered far more than other farmers in other parts of the country and hence the groundswell of orchestrated support is not about grievances but about politics. Fascinating and concerning at the same time.

Take your pick

In May 2019, ‘The Economist’ wrote thus:

Global meat-eating is on the rise, bringing surprising benefits: As Africans get richer, they will eat more meat and live longer, healthier lives [Link]

Fast forward, more than six months later,

How much would giving up meat help the environment?: Going vegan for two-thirds of meals could cut food-related carbon emissions by 60% [Link] – ht: Saurabh Mukherjea of Marcellus Investments