The next round of inflation

The inflation print for March clocked in at 20.7 per cent year-on-year, the lowest level in two years. However, it still remains considerably elevated over the long-term average. Over the last two years, inflation above 20pc on a year-on-year basis has led to significant demand destruction, as real incomes and purchasing power continue to decline. However, despite demand destruction at a household level, the government’s insatiable appetite for plugging its fiscal deficits through more debt continues to fuel more inflation. The government’s inability to initiate reforms that rationalise expenditures, as well as the inability to expand the tax net to increase tax revenues at a pace faster than inflation, continues to keep the fiscal deficit elevated. An elevated fiscal deficit eventually translates into higher inflation, as more money is printed to buy fewer goods available in the economy.