One set happens to be the sufferers, the other set happens to be the drivers of this global monster.

1st of all, market needs to take all the official reports of inflation with a pinch of salt.  High reported inflation doesn’t necessarily mean real higher inflation in comparison to officially reported lower inflation figure coming from another country. It’s no different even in the US as Treasury Inflation Protected Securities aren’t living up to their name, as Bloomberg reported.

However markets have a superficial way of looking at inflation. Global mainstream media and markets look at inflation reports with the same uniform glass. The truth is, there isn’t a single uniform way of comparing inflations across countries, nor there is one for measuring Money Supply.

As inflation remains so poorly understood, both by markets and by policy-makers; the approach of policy-makers to tackle this inflation also varied. From jawboning to tightening of interest rates to export-control of essentials to what not.

Wang Jian, secretary-general of the China Society of Macroeconomics probably got it as right as possible when he stated in the official China Securities Journal “Maintaining economic growth should be our priority when most of the price rises are caused by production costs…Sound economic growth will equip residents well to fight inflation.”

Though China has increased its CRR often to slow-down lending by banks, it hasn’t increased drastically the cost of borrowing for investment and growth. True, that’s in comparison to the 2nd fastest growing major economy and its neighbor, India.

Indian Finance Minister, on the other hand, believed on interest rate tightening. Indian Reserve Bank has been on the job since 3 years, however it failed to have much of an impact. One can’t control localized flood when there is a Tsunami globally.

Reuters  stated ‘India is relying on monetary policy to cool demand and calm prices, and is confident it will get over the problem of high inflation, Finance Minister Palaniappan Chidambaram told the UTVi business news channel in an interview on Tuesday. “The best instrument to reduce aggregate demand is monetary policy and that’s why the Reserve Bank of India, the monetary authority, is the first line of defence,” Chidambaram told the channel.’ Kill demand rather than increase supply of goods is India’s approach. How opposite it was 3 years back!

Indian borrowers are now paying nearly double the interest rates that they paid three years back. As the Fed. experimented with newer and all existing options to reduce the impact of sub-prime crisis by lowering rates; India is on the verge of making a ‘primary crisis’ by stalling growth, and creating bad-assets for its banks.

Indian policy-makers approach is best described as a mixture of jawboning and astrology, as they often come out with the ‘predictions’ that inflation will slow down after couple of months. When no one in the world has any clue (barring Fed., BoJ and the OPEC) on oil prices and future inflation, this jawboning by Indian policy-makers along with monetary-policy based back-dated controls by sqeezing money-supply show they need to revisit Macro-economics 101 under the guidance of Prof. Bernanke.

Most now-a-days belief that ‘macroeconomics textbooks are no longer worth much in the age of globalization’. Bernanke has given a new dimension on how inflation can be controlled in the USA with increased dollar-supply, with global help.

That’s been the two opposite stories of China-India – both reeling under much higher inflation than the US or Japan. China’s monthly CPI for June was tentatively reported at 7.1%, from 7.7% in May, in-spite of its fuel price hikes couple of weeks back. When the fuel price was hiked, almost all business media and economist predicted inflation will come under further pressure!

India’s weekly inflation, more on the Wholesale Price front, is around 11.5%. Interest rate in China is less than 5%, even on time deposits, whereas interest rates in India are now getting into double digits. Retail borrowers pay more than 12% for most secured loans.

What’s been the approach of Japan or US in managing inflation? The word inflation simply does not exist in the dictionaries of both the Fed. and the BoJ. BoJ has been used to see deflation as a monster instead of inflation since ages, and they are yet to figure out this new animal. And Bernanke, like a ring-master with OPEC in the ring, is trying to jawbone inflation with his printing presses running at full capacity, and the helicopters doing the rest.

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