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By HaleStewart November 12, 2013 2:37 pm
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India And Brazil Face Potential Stagflation

Stagflation occurs when a country has low growth and high inflation.  Ultimately, the central bank must make an incredibly difficult decision: should they raise rates to lower inflation -- and potentially start a recession -- or should they keep rates steady and allow inflation to continue, thereby reducing purchasing power?  In the early 1980s, then chariman of the Federal r\reserve Paul Volcker raised rates, eventually crushing inflation.  However, he also started one of the worst recessions the country had seen for a number of years. 

Both India and Brazil are facing similar problems.   Let's start wtih India by looking at its annual GDP growth and inflation rate.



The top chart shows the annual rate of growth has decreased from 9.4% in early 2010 to 4.4% in the most recent reading.  At the same time, inflation -- which had dropped earlier in the year -- has started rising again.  Recently, India raised rates to slow inflation's rise.

Let's turn to Brazil:


Like India, the Brazilian growth rate had dropped sharply from 2010 to early 2012, although it has been increasing over the last few readings.  However, it is still at very low levels relative to previous readings.  At the same time, inflation has remained at elevated levels.

Both of these countries are facing very dificult policy options.  Raising interest rates will slow inflation, but it will also increase each respective currency's value and slow overall growth.  But lowering rates leads to increased inflation, which neither country wants, either..

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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