InvestorQ : Can you tell me about the US inflation for the latest month and why is it relevant to India?
Dia Deshpande made post

Can you tell me about the US inflation for the latest month and why is it relevant to India?

swati Bakhda answered.
3 weeks ago

US consumer inflation for the month of May 2022 came in much higher than expected at 8.6%. That is nearly 30 basis points (or 0.30%) above the consensus estimate of 8.3% put out by Bloomberg. In the last few months, inflation has been on an uptrend. The US consumer inflation was 7.9% in February, 8.5% in March and 8.3% in April. The month of May saw inflation at 8.6%; the highest level of inflation since December 1981, over 40 years back.

Let me clarify that the US does not solely rely on this consumer inflation for its rate policy but depends more on Private Consumption Expenditure (PCE) inflation. This is normally announced after the 25ths of every month for the previous month. However, consumer inflation does set the tone for prices in the US economy. In May 2022, while core inflation was marginally lower, food inflation and energy inflation were sharply higher.

That brings me to the other part of your question as to why should US inflation really matter to the Indian markets. Let me proffer some reasons why US inflation could be of relevance to Indian markets. Firstly, food inflation in the US reflects global supply chain gaps. This could trigger excess food exports out of India. Fuel inflation in the US is also more reliable since the US is both an important producer and consumer of oil, perhaps the largest too.

Now for the policy impact. High levels of inflation makes the Fed hawkish and RBI will have to follow suit. While Fed has hiked 75 bps, RBI has already hiked 90 bps. A bigger risk is that Fed may wind down the bond book faster, leading to drying up of passive fund flows into Indian equity. That is already visible. Above all, you compare economies and their bond attractiveness on real interest rates. US inflation gives you that picture. That is why, the inflation number in the US is of high relevance to India.