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The Federal Reserve’s actions alone don’t explain the rise and fall of inflation but they were far from irrelevant.

For precisely three years now, the economics profession has been collectively fixated on inflation. February 2021, 36 months ago, was the last time consumer-price-index inflation in the United States (all items, 12-month percentage change) was at or below the Federal Reserve’s 2% target.

This recent episode of above-target inflation now shows signs of being over. ‘Shows signs’ is of course code for the fact that you never know. A further shock—ructions in financial markets or a major geopolitical event, for example—could still throw the disinflation trend off course. So far, however, that course appears to be heading directly towards the US Fed’s target of 2%.

One would hope that we learnt something from these painful three years of fast-rising prices. Sharp price increases have served as catalysts for advances in inflation management in the past. From some episodes, we learnt the importance of preserving the independence of the central bank so that it can react unrestrained by political considerations. From others, we learnt that central banks need to establish a hierarchy of policy priorities and must communicate those priorities to financial markets and the public.

This time, however, it is not clear what, if anything, has been learnt. Thinking about the causes of America’s recent inflation, and about why price increases now seem to be subsiding, remains muddled.

The main muddle concerns the role of the US central bank. Does the Federal Reserve deserve blame for the rise of inflation in early 2021 and corresponding credit for the recent decline?

One view is that the acceleration of inflation had nothing to do with monetary policy. It was caused by supply shocks: covid-related declines in labour-force participation, supply-chain disruptions and energy shortages. The Federal Reserve reacted slowly but appropriately. Moving faster wouldn’t have enhanced the availability of semiconductors, or helped to tame inflation stemming from other input shortages. It would have only aggravated the economic downturn underway in 2020 and early 2021.

Along similar lines, some argue that the Federal Reserve played little role in the recent decline of inflation. If inflation came down because broken supply chains were mended and because workers who dropped out of the labour force dropped back in, then this same happy result would have come about without higher interest rates. Moreover, if the main way higher interest rates suppress inflation is by reducing spending and raising unemployment, then there is little evidence of an effect: spending remains robust and American unemployment is at historic lows.

This view is both right and too simple. Along with supply shocks, demand and expectations—i.e., factors that are fully within the capacity of the Federal Reserve to influence—played a role in America’s recent bout of inflation.

With the outbreak of covid, US households found themselves with $30 billion a month less income than in a normal economy. But between the Cares Act and Covid-19 Economic Relief Bill signed by US president Donald Trump in 2020, and President Joe Biden’s American Rescue Plan in early 2021, the US government provided $200 billion a month in tax cuts and spending increases to fill this $30 billion income hole.

Fortunately, these measures limited distress among negatively impacted households and firms. But it is hard to imagine that they also could have avoided fanning inflation—more so given that supply was constrained.

Even conceding that strong demand was part of the inflation story, was it really the Fed’s restrictive monetary policy that brought the tale to its happy conclusion? After all, what had been strong fiscal stimulus in the first quarter of 2021 did not last. The Hutchins Center Fiscal Impact Measure, which shows how the change in fiscal stance contributes to real GDP growth, moved into negative territory already in the second quarter of 2021—and stayed there. So perhaps fiscal policy both caused the problem and solved it.

The main reason for doubting that the Fed played a role in the retreat of inflation is that unemployment did not rise once policymakers began raising interest rates. According to this view, in order to dampen inflation, higher rates must prevent firms from investing and hiring, and thereby discourage households, newly uncertain of their prospects, from spending as before.

But this view ignores the credibility and communication channels of central-bank policy. The Fed signalled, beyond a doubt, that if inflation failed to come down, it was prepared to do more, even at the cost of higher unemployment. It communicated that it would not allow inflation to persist, which moderated the perceived urgency of wage increases. Wage growth did in fact accelerate, but not excessively. This moderation in turn prevented a rise in unemployment while also limiting the Fed’s need to do more.

The lesson from the latest episode of US inflation is that monetary policy is not the entire explanation for the rise and fall of US inflation. But neither is it irrelevant, as some of the Fed’s critics would have it. ©2024/project syndicate.

While opening of bank accounts has increased over the years, the wide gender gap in availing credit needs a policy response.

The following facts have emerged from the spread of the Pradhan Mantri Jan Dhan Yojana, introduced in August 2014. It has led to greater financial inclusion in the case of males and females, with no rural-urban divide, really speaking. However, female indebtedness lags that of males across age groups, probably because of their lower work participation and capacity to take loans. Credit that is tailored to the needs of women can make a difference.

Official data on the possession of bank accounts, types of accounts and indebtedness were collected as part of the Multiple Indicators’ survey through the 78th round of the National Sample Survey (NSS) (2020). The sample comprised 70.8 per cent of persons from the rural areas and 29.2 per cent from the urban areas, with 51.3 per cent being males and 48.3 per cent females.

Spread of bank accounts

On analysis, it was observed that a little above 87 per cent of the persons (aged 15 years and above) have bank accounts. Surprisingly there is no rural-urban divide. This could be attributed in part to PMJDY as it particularly aims at covering the unbanked section of society, mostly rural households.

However, across age groups, the number of males with bank accounts are higher as compared to females, a difference of 5-8 percentage points. However, across age groups (19 to 50 years) there is a positive relationship between age and number of bank accounts across genders. At the lower age group (15-18 years) and highest age group (more than 50 years), the number of bank accounts across males and females are comparatively lower. Further, there is only a small gender gap across all groups; 89.8 per cent males and 84.5 per cent females have an account with a bank or another type of financial institution such as a credit union, microfinance institution, cooperative, SHG or the post office or having a debit card in own name or mobile money. The Survey shows that more than 90 per cent of persons have accounts with ‘banks’.

The Survey also brought out the fact that 15 per cent of the persons in rural areas with bank accounts are indebted to institutional/non-institutional agencies, while it is a tad lower at 14 per cent in the urban areas. According to this Survey, a household member was considered to be indebted if he/she had taken a minimum cash loan amount of ₹500 and that amount remained outstanding as on the date of survey.

Persons in the age-group of 36-50 years are the most indebted at 23 per cent, followed by persons in the age group of 31-35 years at 19.3 per cent.

There is a direct relationship between the proportion of persons having bank accounts and indebtedness across age groups amongst both genders. But there is a wide gender gap in bank indebtedness — at the aggregate level, males at 20 per cent is twice the number of females (9.1 per cent) that are in indebted to financial institutions. In fact, the gender gap in indebtedness increases with age and more so in the most productive age-group between 26 and 50 years.

Lower rate of female participation in the workforce is still the dominant factor in Indian employment. Growth in females’ employment rate was largely driven by the rise in female unpaid family workers. Hence, their ability to avail credit is hampered, thus translating into lower creditworthiness amongst females.

While females are largely linked to banking or financial institutions in one form or the other, they are comparatively less indebted. Mere access to financial services should not be confused with financial inclusion. Lower indebtedness amongst females could be an indicator of lower participation in entrepreneurial activity.

Another factor that could have impinged the slow adoption of financial services by females is the gender gap in mobile ownership and mobile internet usage. According to the National Family Health Survey–5, only 22.5 per cent females reported using mobile phones for financial transactions. Hence, there is slower adoption of digital financial services by females.

Women-focussed policies aiming at providing easy and favourable access to credit with productive income generating employment opportunities will have a positive impact on credit uptake and overall financial inclusion.

Baruah is Associate Fellow at NCAER. Wankhar is a retired Union government officer. Views are personal.

Critics of the Federal Reserve argue that the acceleration of US inflation in early 2021, and the rapid disinflation of recent months, had nothing to do with monetary policy, because the sources of above-target price growth were all on the supply side. This view is both right and too simple.

BERKELEY – For precisely three years, the economics profession has been collectively fixated on inflation. February 2021, exactly 36 months ago, was the last time consumer-price-index inflation in the United States (all items, 12-month percentage change) was at or below the Federal Reserve’s 2% target.

This recent episode of above-target inflation now shows signs of being over. “Shows signs” is of course code for the fact that you never know. A further shock – ructions in financial markets or a major geopolitical event, for example – could still throw the disinflation trend off course. So far, however, that course appears to be heading directly toward 2%.

One would hope that we learned something from these painful three years. Sharp increases in prices have served as catalysts for advances in inflation management in the past. From some episodes we learned the importance of preserving the independence of the central bank so that it can react unrestrained by political considerations. From others we learned that central banks need to establish a hierarchy of policy priorities and to communicate those priorities to financial markets and the public.

This time, however, it is not clear what, if anything, has been learned. Thinking about the causes of our recent inflation, and about why price increases now seem to be subsiding, remains muddled.

The main muddle concerns the role of the Fed. Does it deserve blame for the rise of inflation in early 2021 and corresponding credit for the recent decline?

One view is that the acceleration of inflation had nothing to do with monetary policy. It was caused by supply shocks: COVID-related declines in labor-force participation, supply-chain disruptions, and energy shortages. The Fed reacted slowly but appropriately. Moving faster wouldn’t have enhanced the availability of semiconductors, or helped to tame inflation stemming from input shortages. It would have only aggravated the economic downturn underway in 2020 and early 2021.

Along similar lines, some argue that the Fed played little role in the recent decline of inflation. If inflation came down because broken supply chains were mended and because workers who dropped out of the labor force dropped back in, then this same happy result would have come about without higher interest rates. Moreover, if the main way higher interest rates suppress inflation is by reducing spending and raising unemployment, then there is little evidence of an effect: spending remains robust and unemployment is at historic lows.

This view is both right and too simple. Along with supply shocks, demand and expectations – factors that are fully within the capacity of the Fed to influence – played a role in America’s recent bout of inflation.

With the outbreak of COVID-19, US households found themselves with $30 billion a month less income than in a normal economy. But between the CARES Act and COVID-19 Economic Relief Bill signed by President Donald Trump in 2020, and President Joe Biden’s American Rescue Plan in early 2021, government provided $200 billion a month in tax cuts and spending increases to fill this $30 billion income hole.

Fortunately, these measures limited distress among negatively impacted households and firms. But it is hard to imagine that they also could have avoided fanning inflation – more so given that supply was constrained.

Even conceding that strong demand was part of the inflation story, was it really the Fed’s restrictive monetary policy that brought the tale to its happy conclusion? After all, what had been strong fiscal stimulus in the first quarter of 2021 did not last. The Hutchins Center Fiscal Impact Measure, which shows how the change in fiscal stance contributes to real GDP growth, moved into negative territory already in the second quarter of 2021 – and stayed there. So perhaps fiscal policy both caused the inflation problem and solved it.

The main reason for doubting that the Fed played a role in the retreat of inflation is that unemployment did not rise once policymakers began raising interest rates. According to this view, in order to dampen inflation, higher rates must prevent firms from investing and hiring, and thereby discourage households, newly uncertain about their prospects, from spending as before.

But this view ignores the credibility and communication channels of central-bank policy. The Fed signaled, beyond a doubt, that if inflation failed to come down, it was prepared to do more, even at the cost of higher unemployment. It communicated that it would not allow inflation to persist, which moderated the perceived urgency of wage increases. Wage growth did in fact accelerate, but not excessively. This moderation in turn prevented a rise in unemployment while also limiting the Fed’s need to do more.

The lesson, then, is that monetary policy is not the entire explanation for the rise and fall of US inflation. But neither is it irrelevant, as some of the Fed’s critics would have it.