A Christmas celebration has started at least on the global stock markets. The financial markets are showing surprising buoyancy and climbing new heights. Indian stock markets jumped up. The representative BSE index rose by close to 1,000 points and touched its historic record high of 62,412. The NSE index is also rising in step, indicating a more broad-based recovery of the markets. The immediate trigger for the global financial markets to shake off lethargy and respond with verve is the positive feedback from the Federal Reserve of the United States about the prospects for the global economy and the course for inflation. However, underlying these is a major battle among economists about their perceptions of the course of the general price level and its nature. The world had gotten used to low levels of inflation and efforts to perk the prices. Japan had faced decades of negative inflation (or deflation) and falling prices which had devastated its economy. Woes do not come alone. The threat of inflation was compounded by the threat of global recession.
The invasion and war worked out through higher prices for food and energy throughout the world. The cramp down on supplies of energy items from Russia pulled up overall energy prices. Europeans had faced severe strains on their disposable incomes which resulted in higher energy prices. The third world countries faced problems of shortages of food, energy being another secondary blow. The compounding impact of these developments was that the global economy was feared to shirk. Coming close on the heels of the pandemic, major economies were shrinking rather than expanding. Hence, these were the ideal recipe for a global slowdown and recession. They all had turned on whether the current spate of inflation had become endemic or transitory. Some eminent economists had argued that inflation was getting structural and would call for heavy-handed interventions to control it. This in effect meant large doses of interest rate hikes — that is the copy-book economist medicine. Others argued that inflation was temporary and needed to be treated with caution. The Fed had approached inflation control with the former point of view, that is, large hikes in inflation and control of prices. This would automatically have brought a recession in its train.
There are indications now that the talk of an impending recession in the world economy is receding. After all, a global recession might be avoided, though not an immediate return of leaping growth rates. As the Federal Reserve of the United States released its latest monetary policy consultations proceedings it is interpreted as indicating that future interest rate hikes would be paired. Maybe, the Fed will not raise interest rates in the short term. This is a win for those economists who maintained that the recent sharp rises in overall prices were a temporary phenomenon and that the price rise should abate shortly. That is inflation was a transitory one and not one which had gotten embedded. Financial markets are now gaining buoyancy. But the real economy would come to play. It looks as though the key would still be how the Russian invasion of Ukraine would go. Will the energy markets revert to sustainable levels?
