Bertie was on his annual visit to the Big Apple when the Federal Reserve cut rates by 25 basis points. When he was in the city a year earlier, the Fed had cut by 50 basis points. Give a man two dots on a piece of paper, and he will draw a straight line through them—Bertie is no different. He now thinks of his New York visits as harbingers of global easing.
A chuffed Bertie was holding forth on this theory to a friend who works in the tech sector. The friend seemed more concerned about the H-1B visa scare than about what the Fed was doing. He smiled distractedly and said, “They are cutting interest rates, are they?” Bertie nodded, with an unsaid ‘Keep up, man!’ in his head.
“Why are they cutting rates?” the friend asked, almost innocently. Bertie hadn’t thought about this question, so he came back with a “Because I am here !” wisecrack and laughed rather more than it warranted.
On the train ride back to the hotel, his friend’s question kept coming back to him. New York certainly did not feel cheap—what Bertie was paying for a tiny hotel room on the edge of Manhattan would fetch him a suite at any of the Taj properties in India. Uber rides felt steep (hence the train), and so did his morning fix of coffee and a doughnut.
With time to kill on the train, he dug up some old receipts for stays and meals from before the pandemic and shook his head as he noticed that prices had almost doubled.
That realization prompted our man to rummage through his inbox to find out how the economic intelligentsia was rationalizing the rate cuts. After going through a few notes that seemed to have been written by the same AI model, Bertie concluded that the narrative was that inflation was under control while the labour market was showing signs of weakness—hence the Fed had cut as a “risk-management measure.”
Given his recent observations about New York prices, the “inflation was under control” line jarred. The explanation offered was that the year-on-year change in prices was muted, which meant that inflation could be assumed to be under control. The year-on-year change in prices is indeed the measure of inflation the world over, and a key economic variable that central banks watch closely.
Bertie looked out of the grimy window of the train, thinking about the 2019 hotel bills and how they had doubled in six years—an annualized increase of about 12%. No one in their right mind would describe an annual increase of 12% as ‘under control’. That made him wonder whether inflation should be measured as a ratio of prices to incomes, rather than just an annual change in prices. Inflation, he thought, should be labelled as well-behaved only when that ratio remains stable over long periods—and from his annual visits to the US, he knew that was certainly not the case.
Now, Bertie takes all his thought strands to their logical conclusions. He inverted the logic and wondered whether all hyperinflationary economies could eventually declare that they have won the war on inflation, since prices cannot rise to infinity. The price-to-income ratio may take years to catch up—if at all—but the year-on-year price metric will get “tamed” sooner rather than later, just by the sheer force of arithmetic. Based on this epiphany, Bertie was last seen evaluating the investment case for Argentina and Turkey.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
