Early indicators are showing signs of economic stagnancy amid rising prices in much of the world

China’s non-manufacturing PMI fell below 50 in April and signs from advance retail sales indicate that it could drop further in May. Service sectors in Japan and Germany are weak as well. Manufacturing PMIs remain robust thanks to stockpiling, but could lose steam once that phase is over.

At the same time, as services activity is beginning to slow around the world, inflation is picking up. Headline inflation in all four economies rose by 20 to 40 basis points over the latest two months of data readings.

Core inflation (which excludes volatile energy and food prices) has also risen in the US and China, the world’s two largest economies. The US Federal Reserve’s preferred measure of core inflation, Core Personal Consumption Expenditure (PCE), is at its highest level in over a year at 3.2%.

In an advanced economy (especially), a highly important signal of price instability is the index of inflation expectations; in the US, as measured by the University of Michigan’s consumer survey, this has risen sharply from about 3.2% a year ago to 4.8%.

Stagflation—the portmanteau of stagnation and inflation—is what an economy suffers when growth stalls and inflation rises.

Persistently rising price levels can feed expected inflation, and when these expectations rise, there is every likelihood of inflation getting entrenched in the economy.

This is what happened as a consequence of the Arab oil embargo in the 70s, resulting in persistently high inflation and weak growth around the world, which lasted well into the 80s.

The oil embargo and ensuing stagflation offer a hazy parallel with the geopolitics of today, with crude oil and petroleum product supply constrained by the closure of the Strait of Hormuz. Oil prices have risen by some 40%.

For most countries, stagflation is a dangerous economic scenario. For developing countries like India, it is even more significant because it is particularly difficult to combat. Intervening through monetary policy by increasing interest rates risks a negative impact on growth, while doing the opposite to stimulate employment risks stoking inflation.

India’s Composite PMI remains strong at 58, but with each passing day of the impeded flow of oil and petroleum products, this growth is at risk.

Headline inflation began to rise steadily from its low six months ago. India has taken the Gulf supply disruption’s hit primarily on fuel prices, capital inflows and the rupee.

In a recent report, JPMorgan Research squarely lays blame for the sinking rupee on a dramatic reduction in foreign direct investment (FDI) into India. JPMorgan argues that FDI into a country is dependent on “push” and “pull” factors.

‘Push factors’ such as relative interest rates started reversing when developed country central banks, including the US Fed, began increasing interest rates in 2022. Not recognizing this sufficiently, India has done very little to address pull factors.

‘Pull factors’ are really code for strong economic reforms that make a material difference to the ease of doing business in India and makes the country a competitive source market for global supply chains.

Many economists now believe that the pace of economic reform, openness and simplicity in the country must accelerate to attract modern business supply chains. Push factors are likely to remain tough because it seems likely that the Fed and other developed-country central banks will go into a “rate increase” cycle. India must not hesitate to raise rates in tandem, so that we at least hold on to the status quo of ‘push factors.’

The US trade-policy tariff shock of 2025 did put into motion a round of reforms in India that included the reduction of direct and indirect taxes (the goods and services tax, for example), consolidation of labour codes and monetary as well as prudential policy easing.

This combined with a decent monsoon season and benign overall inflation sowed the seeds for a modest private capital expenditure cycle to be kick-started in India towards the end of last year.

Unfortunately, the West Asian conflict has bestowed a frost that might have killed those green shoots. Yet, as the signals show, the need for fast and sharp reforms has only become clearer since. As a recent Economic Survey pointed out, Indian policy action must shift significantly to state-level deregulation and reform.

PS: Like the Bay Woodpecker’s maniacal laughter signalling rain, the rupee’s fall is a clear call for economic reform.

The author is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand