EDITORIAL : THE HINDU, INDIA

Inflation expectations

Highlighting the crucial connection between the current high levels of inflation and the expectation among consumers that prices will continue to rise as sharply in the future, the Reserve Bank of India has pointed out that since headline and core inflation have overshot even the most pessimistic projections, there is a concern that inflation expectations might become unhinged. Indeed, anchoring inflation expectations at a low level has become one of the most daunting challenges of monetary policy. Reeling under high food inflation many households do not see any respite even in the year ahead. The same despair permeates the outlook on fuel prices as well, probably with an even greater justification. While global oil prices have been ascendant, they are not fully reflected in the domestic fuel prices. Both inflation and inflation expectations are conditioned by certain well known instruments of public policy. There should be a clearly stated inflation objective for macroeconomic policy and management, and also for monetary policy. Secondly, central banks must deploy a credible range of monetary instruments which they must be able to refine as and when necessary. Thirdly, conditions ought to be created for the proper transmission of the policy action. In India the RBI is responsible for controlling inflation, but the government has an important role in influencing supply-side factors.

Sound inflation management demands that the central bank and the government work in tandem even if, at a particular juncture, inflation is attributable to a factor over which only one of them has influence. Thus, even when on many a recent occasion inflation was being pumped up chiefly by food prices, the RBI expressed its resolve to back government action with monetary measures even if those were not clearly indicated. The major measures announced in the recent RBI monetary policy statements are noteworthy. For instance, the 0.75 percentage point increase in the repo rate over six weeks, making the repo rate the sole policy rate, and the creation of the new Marginal Standing Facility from which banks can borrow at one percentage point above the repo rate are all decisive steps in the context of inflation management. It is highly significant that even when the RBI lowered the growth estimates and increased those of inflation thereby differing sharply from the official position, the government has backed the central bank. More realistic growth and inflation estimates, and greater cohesion between the government and the RBI are all vital ingredients in a well thought out strategy of controlling inflation and anchoring inflation expectations.

Lessons from Japan quake

The 9 magnitude Tohoku-Oki earthquake that struck Japan on March 11, 2011, and triggered the deadly tsunami, was more powerful than expected. The magnitude of quakes in this region has been around 7-8 in recent centuries. Papers published recently in Nature and Science journals reveal why the quake off the Sendai coast turned out to be deadly. Though the fault north of Tokyo was assumed to be fairly simple and uniform in nature, the March 11 event showed how complicated it was. In the Japan Trench, the subduction (diving) of the Pacific Plate under the Okhotsk Plate occurs at an average rate of 8-8.5 cm a year. The subduction, it now turns out, has not been smooth. The plates had apparently got stuck (locked) at certain portions along the fault. Since the plates are converging, any locking of the plate interface produces an enormous build up of strain. Seismologists had presumed that the relatively soft material of the seafloor near the Japan Trench could not support a large accumulation of strain. Hence any failure of the fault and the resulting strain release was expected to produce only large earthquakes, not a 9 magnitude killer quake. However, enormous energy was released on March 11 owing to the sudden slip of a compact area (400 km in length and 200 km in width) of the plate interface. The epicentre had moved seaward by as much as 24 metres and lifted upward by about 3 metres.

Only two of the five ruptured segments had experienced an extreme slip. But this increases the possibility of very high magnitude quakes striking the southern portion of the fault due to stress transfer. The consequences could be severe if this portion of the fault has also been locked. If predicting quakes with a high degree of confidence is not possible in the case of land-based faults, scientists are far worse off when it comes to subduction zones located in the deep ocean. The lack of sea-based instruments to measure strain build-up is a huge limitation. Though Japan had a handful of sonar transponders located on the seafloor near the Trench, measurements were not taken frequently, notes a paper published recently in Nature (“Hidden depths,” by Andrew V. Newman). Vital information collected at regular intervals before the deadly quake could have minimised the loss of human life. Unfortunately, this was not done as collecting data from the sonar transponders is prohibitively expensive. The March 11 event should prompt the scientific community and governments to find cheaper and more efficient ways of obtaining critical information.