Do consumers really consume? Inflation on the rise again…
► Cons der the follow ng set of propos t ons. Currency subst tut on ncreases, perhaps not by leaps and bounds, but by drast c upward movements accompany ng each and every jump n the exchange rate. Then, t stab l ses around the new mean level unt l a new shock. We may call th s a new “plateau”. Should th s happen, the exchange rate pass-through coeff c ent would almost automat cally r se aga n, and nduce an nflat onary self-generat ng sp ral. We are not there yet. The old nert a coeff c ent (Hurst coeff c ent) represent ng currency (asset) subst tut on stood at over 0.60 n 2001, and the FX depos ts/M2 rat o was sl ghtly below 60%. We are currently 20 percentage po nts below that. Even so, nflat on has become pers stent. Inflat on s cost-push, and t has already had a bear ng on pr c ng behav our. The recent nflat onary surge that m ght sh ft the CPI up by 0.7-1.0 po nts above our est mate by the year end s not due to the buoyancy of demand, but to those two factors.
► The unl kel hood of a strong currency (asset) subst tut on clearly nd cates that convergence to a “good” equ l br um out of a mult pl c ty of expectat onal equ l br a can’t be eas ly ach eved through the “smooth ng” of expectat ons alone, wh ch rema n subject to cascades and reversals anyway. Not only reverse asset subst tut on n a mass ve way s d ff cult to obta n unless a rad cal transformat on looms large at the hor zon and unless huge FDI nfluxes look probable, but also t may be true that such a subst tut on sn’t the best way to nduce susta nable growth. For growth comes n many var et es. What we need most s growth based on human cap tal and cap tal tself, mean ng a substant al source of growth should come emanate from product v ty. True cap tal s scarce. But endow ng the economy w th enough cap tal to ensure a new take-off s only the beg nn ng of a somewhat compl cated and poss bly long story.
► Is nflat on becom ng stcky? This is in a sense awkward because what s go ng on s rem n scent of the olden days when the exchange rate pass-through determ ned everyth ng. Does anyone remember the nfamous 2000 programme, the last of the Tabl tas? It d dn’t work, but the reason why t was mplemented n the f rst place was the dom nance of the exchange rate over everyth ng: nflat on, nterest rates, currency subst tut on and all that… Inflat on s st ll gallop ng. Is t supply-s de? After the end of the Cred t Guarantee Fund, and now that taxes are mak ng the headl nes, not government spend ng, nflat on couldn’t be demand-pull, sn’t t? Pr ces st ll go up, and that’s about t. It s worr some. Is t the ma n culpr t the exchange rate, l ke the (very) old days?
► Desp te the Cred t Guarantee Fund, corporate loans have ncreased by 17.6% year-to-date, and consumer loans by only 14.5%. Also f scal pol cy cannot be resorted to as heav ly as before, we have very few opt ons left at th s stage to render GDP growth susta nable.