ECONOMYNEXT – The US Fed generated 7.5 percent inflation in January 2022 from 7.0 percent in December as Sri Lanka’s central bank created 14.2 percent adding to the inflation from the dollar to which the rupee is loosely pegged.

US Fed chief Jerome Powell for many months claimed that inflation was ‘transitory’ and is continuing to print money at least until March despite later admitting that the word should be dropped.

In America, used cars and truck prices rose 40 percent in the 12-months to December 2022.

In years with monetary stability, used car prices go down with depreciation. In Sri Lanka in the 1980s when the currency collapsed every year, people could buy a car and sell the ‘depreciated’ asset at a higher price than they bought.

Now with import controls, used car prices in Sri Lanka have gone up faster, but with actual and expected currency depreciation, car prices would anyway have gone up to some extent.

US economist Steve Hanke has warned that even if the Fed tightens monetary policy now it will take 12 to 24 months for results to show, indicating that US inflation will be 6 percent or higher in 2022 and 2023.

Last year Hanke, Professor of Applied Economics at Johns Hopkins University in Baltimore, accurately predicted 6 to 9 percent inflation for 2021 based on earlier money supply growth.

Money supply measured by M2 is still growing over 12 percent on a year over year basis.

“And to actually hit their inflation target of 2 percent a year they will have to bring it down to about 5 to 6 percent,” Hanke said in an recent interview.

“That is about half of what it is now. Let’s assume they do that right away. We will have inflation over 6 percent over 2022 and 2023 and into 2024.”

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He said the Federal Reserve is usually forced to act when the public no longer accepts their alternative explanations for high inflation.

Fed Chief Jerome Powell’s favorite explanations have been ‘transitory’ and ‘supply chain disruptions’.

Politicians in particular do not talk about money supply because they do not understand it, Hanke said.

Central banks avoid talking about it because they want to avoid responsibility for their actions.

“As a result they want us to to talk about a lot of ad hoc irrelevant causes for inflation because the politicians do not want to get nailed for inflation,” Hanke explained.

“Certainly the Fed does not want o get nailed as the bad guys.

“So what do they do? They spin a yarn. And the yarn is inflation is a transitory thing. It is caused by all these odd ball things: supply chain problems, port plug ups, the weather, meat prices going up because the supply of cattle is unusually low, monopolies.

“The latest thing in the US is that they want to engage the Department of Justice in raising Cain about anti-trust violations,” Hanke said. “So the monopolists are causing inflation.

“That is pure propaganda. Everything you are reading is pure propaganda. The press of course goes right along with it.”

In countries like Sri Lanka without a floating exchange rate, printed money hit the currency peg fast, usually in four to six weeks analysts say.

If printed money is given for energy subsidies it hits the currency peg even faster.

Sri Lanka’s central bank also has a history of giving various excuses and printing money to keep rates down.

The favorite in the past has been rise in “administered prices”. No mention is made in earlier months when administered prices keep the index down and money is continued to be printed. Supply constraints in another.

The false claim that ‘budget deficits’ cause inflation has been long time favourite, though deficits simply transfers money from the public to the government creating no change in aggregate demand as long as money is not printed to keep rates down.

Lately it had jumped of Fed’s ‘transitory’ bandwagon.

“Supply side factors remain the key driver of domestic price pressures amidst the possible signs of demand pressures,” Sri Lanka’s centarl bank said in January as inflation soared to 14.2 percent.

“Inflationary pressures in the domestic front continued to be fuelled by supply side disruptions, upward adjustments to administered domestic prices, and the strengthening of underlying demand conditions in the economy as reflected in the rise in core inflation.

“Such supply driven price pressures are expected to be transitory, although the possible build-up of demand driven inflationary pressures may compel the adoption of proactive monetary policy measures, which will also help in managing inflation expectations.”

Eventually rates are raised when foreign reserves fall and inflation has gone to very high levels. When the US eventually tightens, Sri Lanka’s currency peg collapses.

Sri Lanka is currently printing money to sterilize interventions after giving reserves for imports and also to give an addition eight rupees to expat workers for their remmittances which will result in further reserve losses. (Colombo/Jan11/2022)