#77 The Inflation Conundrum 🎧

<p><em>This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: </em><em>how do I think about a particular public policy problem/solution?</em></p><p><em>Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.</em></p><p><em>PS: If you enjoy listening instead of reading, we have this edition available as an audio narration courtesy the good folks at </em><em>Ad-Auris</em><em>. If you have any feedback, please send it to us. </em><em>Listen in podcast app</em></p><p><em>- RSJ</em></p><p>The Trump administration is negotiating another stimulus package with Democrats that could be upwards of US$ 1.8 trillion. The Federal Reserve’s balance sheet continues to expand since the beginning of the pandemic. There’s a possibility it could touch US$ 10 trillion by the end of the year as it buys up treasuries, corporate bonds, mortgage-backed securities and muni bonds. With all this liquidity in the system and money in the hands of the average American, the macroeconomic puzzle is: where is the promised inflation? And if there’s no rise in inflation after such a dramatic increase in the deficit, why should the US bother about financial prudence? Why not just print money and spend your way to growth and prosperity?</p><p>The Indian Case</p><p>This has some resonance for India too. The loose monetary and fiscal policy regime we ran for longer than necessary after the global financial crisis (GFC) leading to high inflation in 2012-14 still casts a long shadow. That experience led to the flexible inflation target (FIT) that was set by the government for the Monetary Policy Committee (MPC) of the RBI. The results of the FIT regime have been mixed. It had become clear a couple