Food-Price Politics, Inflation Economics And Central Banks

It is fly-fishing season. Jackson Hole in Wyoming is a go-to summer destination for fly-fishing enthusiasts. The famed haunt is also the venue this week for the annual Economic Policy Symposium hosted by the Kansas City Federal Reserve. Fly fishing—the artful use of artificial fly to snare fish—is an apt metaphor for monetary policy, which similarly calls for the use of policy artifice for snaring inflation.

Arguably, it isn't a coincidence that Paul Volcker, the legendary former US Fed chief who tamed inflation, is also a recognised giant of fly fishing. The focus of the symposium, rather appropriate given the context, is 'Reassessing the Effectiveness and Transmission of Monetary Policy'. Presumably, an array of global central bank officials, led by US Fed Chair Jerome Powell, who have spent over 18 months in knee-deep water, will examine the efficacy of the fly and the lines and tackles used to hook inflation.

Data reveals that inflation in the US has come down, as it has in India and is forecast to slide across the world to around 5.9% this year—sceptics at T.S. Lombard and elsewhere argue lower inflation has more to do with easing of supply-chain issues and labour and less a testimony for central-bank action. The buzz in the markets—stock indices hover at highs and bond yields are trending lower in expectation—is that Powell will use the occasion to signal a September rate cut.

Public sentiment, though, is not convinced by data or claims of falling inflation. The credibility of the central banks in the public square is haunted by the singular question: Why doesn't it feel so?

The combination of lower household incomes and higher prices is propelling gloom-and-doom politics—aggravating the rout of the Tories in the UK, rendering the Macron regime in France a lame duck, leading to the ouster of Sheikh Hasina in Bangladesh and the erosion of majority for the NDA in India. In a year dotted with elections, rhetoric about the cost of living is ricocheting across time zones.

The nub of the issue—beyond the technical definition of inflation—is that public anger is rooted in the reality that lower inflation doesn't translate into lower prices. For months, consumers across the world who were told inflation was temporary now find that the price rise is permanent. In the US, heading for polls in November, candidate and Vice President Kamala Harris reeled out grocery prices. "A loaf of bread costs 50% more today than it did before the pandemic, and ground beef is up almost 50%." Former president and candidate Donald Trump lined up a table with cans of food, meat, milk, and cereals and blamed the Biden-Harris administration for spiralling prices.

The issue of cost of living is front and centre in the polls and the candidates are racing to promise solutions. Harris promised a rally, "My plan will include new penalties for opportunistic companies," and added that she will introduce a law against price gouging by mega corporations. Trump was quick to dub the idea as the 'Maduro plan' of Comrade Kamala and promised, "I will immediately bring prices down, starting on day one. We will end Kamala's war on American energy, and we will drill baby drill."

Neither Harris nor Trump's ideas promise redemption. The idea for a law against price gouging isn't exactly new. In August 1971, Richard Nixon announced a 90-day freeze on the costs of all goods, services and wages. Nixon declared: "To the average person in this country, this wage and price freeze—to him, it means you mean business. You're going to stop this inflation." It did not. The move distorted the delicate balance between supply and demand and was instrumental in catalysing the energy crisis of the 1970s.

Indeed, the episode is often referred to as the textbook case on how not to fight inflation. Opinions on efficacy are essentially divided on how bad the idea could be. As for Trump's drill baby drill theme song, the fact is that the US produced more gas and oil in 2023 than any other country. Drilling more oil could at best bring down the cost of transportation and some inputs but how it can lower food prices is unclear.

In India, the government has laboured to underline that it is doing all it can to bring down inflation. The public, which experiences the pain of the cost of living on a day-to-day basis, however, is far from convinced. Indeed, RBI Governor Shaktikanta Das averred that "persistent food inflation is imparting stickiness to headline inflation.".

It bears mention that while politicians in the US are debating price controls, India has used import and export controls to stabilise prices. This month, the government shared with Parliament the price line of 22 products over two years and food inflation has persisted despite the use of measures such as the Price Stabilisation Fund.

The frustration of the political class stems from the inability of central banks to tame food price inflation. The struggle to contain prices is a common facet in advanced and emerging economies. In the US, the CPI has slid from its high in the past year, but food inflation has persisted. Similarly in India, the overall CPI has come down from around 7.5% in July 2023 to 3.5% in July 2024. Food price inflation has been high—dropping only in July to 5.4 % from 9.4% in June—despite record production and surplus. To appreciate the challenge for emerging economies, consider this: the weightage for food in India is over 45%—effectively food constitutes nearly half the consumption basket for Indians, whereas in the US, it is below 15%.

The conundrum faced by central banks finds expression in the Monthly Bulletin of the RBI. In January 2024, the authors, led by Deputy Governor Michael Patra, asked: "Are Food Prices the 'True' Core of India's Inflation?" and cautioned that monetary policy be mindful of the "risks of overreaction to transitory shocks" as well as dangers of "ignoring persistent food price shocks". In August 2024, Patra et al revisited the question and asked "Are Food Prices Spilling Over?" The sequel observes that while shocks may lie outside of monetary policy but persistence and spillover calls for monetary policy to "be disinflationary to quell these price pressures".

Make what you may of the analysis, what seems apparent is that monetary policy is expected to address that which it is not equipped to address. Interestingly, the Economic Survey had last month questioned the very basis for factoring food inflation in the design of monetary policy and even suggested "it is worth exploring whether India's inflation targeting framework should target the inflation rate excluding food". The suggestion has reignited the debate on the influence of food price inflation on long-term expectations—as price rise tends to seep into wages and into core inflation.

The quest for food price stability flies in the face of the fact that monetary policy is yet to provide convincing evidence of its ability to target food inflation. The fact is that monetary policy is a blunt instrument, and studies show its impact on food prices is far from defined and given the inadequacies. Monetary policy can at best tighten or loosen the availability of money to arrest or propel demand. Food (and fuel) prices are informed and influenced by a multiplicity of factors—from climate to supply-chain issues and even availability of labour for harvest. For instance, monetary policy can hardly address the delay in monsoon in India which affects prices of tomato and perishables in June or excess rainfall in February or March which affect wheat and onion crop. Obviously, production must be aligned with distribution for access—in India, for instance, the need for a national grid for perishables and expansion of food processing merits attention.

This brings us back to the politics of food price inflation and the imperative faced by elected governments. Central to the cost-of-living crisis is the issue of affordability. The parade of disruptions and geopolitics has impacted the ability of governments to spur growth to enable incomes match need if not want!

The political class is quick to fashion interventions to enable affordability. Welfare has moved from subsistence to subsidising consumption. In the wake of the war in Ukraine, the governments in the UK and in Europe paid citizens for electricity, gas and provided transport subsidies. In the US elections, for instance, both Trump and Harris campaigns are competing to assure low-income workers exemption from taxes on tips. Housing is a major factor in cost of living—so the Harris campaign is promising a starter home dole of $25000 to first-time home buyers. Trump has promised no tax on social security for seniors and cut electricity tariff by half.

In India, the government is already providing free food for over 813 million. There is also a long list of private goods—from gas cylinders to rooftop solar to toilets to homes. Indeed, in the run up to the assembly polls, Maharashtra, Jharkhand and Haryana have joined a dozen states which now provide cash transfers to women voters.

The use of public monies to defray expenses has led to a rise in deficit and debt. The US adds roughly a trillion dollars to its deficit every 100 days. As per the IMF, India's gross government debt-to-GDP ratio is hovering at 82%. The IMF estimates that public debt as a fraction of GDP has increased significantly across advanced, emerging and middle-income economies and is expected to touch 120% and 80% of output by 2028.

It is instructive to note that the price for delivering affordability is met through fiscal transfers and is being parked on the balance sheets of governments. This informs and influences inflation expectations and makes inflation targeting harder to achieve.

As officials of global central banks meet at Jackson Hole and brainstorm on 'Reassessing the Effectiveness and Transmission of Monetary Policy', they may seek advice on emerging challenges from Volcker on the art of fly fishing—on how to cast the line, land the tackle and hook inflation.

Shankkar Aiyar, political-economy analyst, is the author of 'Accidental India - A History of the Nation’s Passage through Crisis and Change', 'Aadhaar: A Biometric History of India's 12-Digit Revolution' and 'The Gated Republic: India’s Public Policy Failures and Private Solutions.' He posts on X @ShankkarAiyar.

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