There is a silver lining in every cloud, the old saying goes. Not so, it appears, when there is cloud inflation on the horizon. Monday’s data on retail inflation for August in India (7%) and Tuesday’s data on inflation in the US (8.1%) for the same month confirmed what many have feared for some time. Even though the debate has shifted from the earlier determination of whether inflation was transient or permanent, to the new issue of whether it is structural or cyclical, what is beyond dispute is that the fight against inflation is unlikely to be won quickly or easily.
Macro data is rarely clear. Depending on how you cut and slice the data, you can usually find some silver lining in the cloud, no matter how deep it may seem at first glance. Unfortunately, there’s nothing capitalizing about the latest inflation data. opposite of this. Even after giving exemption for the base effect, it disappointed on several fronts. To begin with, it was the eighth consecutive month in this calendar year when inflation hit the upper end of the Reserve Bank of India’s (RBI) target band of 2-6%. This was higher than the estimate (6.9%); This reversed the declining trend of the last three months; This was driven by sharply higher food inflation (7.7% against 6.8% in the previous month); Core inflation was close to six per cent and, perhaps in the most ruthless cut, rural inflation was higher (7.2%) than urban inflation (6.7%). Remember, our rural population is much larger than the urban one; Moreover, the income level in the past is also very low so high rural inflation hurts many more Indians.
You might also like
Big IPOs are coming. Is the market ready?
Why we need less food in our inflation basket
SEBI probes management of 20 funds 10,000 crore
Why you should be wary of business cycle funds
Certainly, high (and persistent) inflation is a global phenomenon, as evidenced by U.S. inflation numbers that came a day later than ours, and, again, exceeds most estimates, despite declining gas costs. . As in India, core inflation, ie inflation excluding food and fuel, also came in higher than expected (7.4%, yearly). Remember, India and the US are not outliers. There is hardly any major economy today that is not battling high inflation. But this is a small consolation for a country like India, whose poverty line is about 200 million. The numbers may vary slightly depending on how the poverty line is defined but it cannot be denied that they are significant.
Sure, commodity prices have corrected. The average international crude oil price declined by 7.7% to $97.7 a barrel in August 2022 from $105.8 a barrel in July 2022, and this will help keep fuel inflation (currently 10.8%) under control. Except that high US inflation and therefore strong action by the US Federal Reserve (read, a sharp increase in interest rates) is bound to strengthen the US dollar and together with weaken the rupee, the domestic cost of oil and all other imported goods. and, in turn, domestic inflation.
These are the final inflation-related data points available just days before the RBI’s Monetary Policy Committee (MPC) meeting in late September 2022 and the Fed’s FOMC (Federal Open Market Committee) meeting in September. , Fed Chairman Jerome Powell has made his intention clear. The Fed is in for the long haul; It will do ‘whatever is necessary’ to bring average inflation back to two percent, no matter how much pain the Fed’s action inflicts on the US economy. Continued aggressive rate action is almost on the cards now. Most economists expect the Fed rate to rise 75 basis points for the third time in a row, with some suggesting it could be an unprecedented 100 basis points.
On the contrary, there have been mixed signals from RBI. From a purely monetarist point of view, the case for another increase of 50 basis points is strong. But the RBI, unlike the US Fed, is also the government’s merchant banker, with the authority to ensure that the government’s huge appetite for loans is not only met but also at the lowest possible cost. This hinders its ability to act on the price front, unlike other central banks. In its dilemma, Finance Minister Nirmala Sitharaman has indicated her preference for some soft-peddling by the RBI on the rate front in a recent speech at Delhi-based think-tank, ICRIER.
Perhaps that explains why our Sensex has underperformed our inflation data, while the US S&P 500 is down 4.3% – the biggest drop in more than two years on news of US inflation data. Perhaps the fact that WPI (wholesale price inflation) came down slightly at 12.41% against 13.93 on July 22, while remaining firmly in double digits for 18 months, gave the markets comfort soup that RBI was not a hammer and tweezer. Will go against inflation unlike the Fed. But, as Fed Chairman Jerome Powell said in Jackson Hole, “without price stability, the economy works for no one”. So will RBI learn from Powell’s book or listen to the finance minister?
Elsewhere in Minto
In Rai, make a case for Vivek Kaul Walmart, Netflix and Spotify Merge, Why Shefali Bhatt’s argument takes hot from heated seats Don’t always give hot brands. Andrea Felstead writes on lipstick effect after the pandemic, long story goes in SEBI’s fight to rein in algo trading,
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.