InvestorQ : How did you interpret the US inflation number for October and what it means for India?
Debbie Mascarenhas made post

How did you interpret the US inflation number for October and what it means for India?

Arti Chavan answered.
3 weeks ago

You can almost call it a piece of good news coming from the US. Consumer inflation in the US came in lower than expected at just about 7.7%. But more than the number, it is the trend that is really important. In the month of June 2022 consumer inflation had peaked at a level of 9.1%. Between June 2022 and October 2022, the consumer inflation has gradually tapered by 140 bps from 9.1% to 7.7%. To be fair, 140 bps fall in consumer inflation is paltry compared to the 375 bps of monetary rate tightening by the Fed. However, the good news is that in October, the consumer inflation was lower than the consensus street expectation.

Immediately after the inflation data was announced, the Dow rallied more than 3% and the NASDAQ rallied 7%. In October 2022, inflation had fallen below 8% for the first time since February 2022. Rate hikes can only do part of the job in containing inflation by restricting consumption. The tougher job is on the supply side, which will have a time lag. Dow and NASDAQ celebrated the fact that the lower inflation was a signal that the Fed would now sober down in its rate hike aggression. That is enough to keep the markets inspired for the next few days, although it does not change things too much structurally.

What is really important in the October 2022 inflation number is that the yoy inflation was lower across all the 3 major categories viz. food inflation, energy inflation and core inflation. The food and core inflation may have tapered only to the extent of 30 to 50 basis points, but there were some important sub-trends. For starters, food at home category has seen a sharp fall in inflation, while core inflation has been largely driven by higher oil prices and that is evident in the pressure on energy related services. The 7.7% headline inflation can be broken up into 10.9% food inflation, 17.6% fuel inflation and 6.3% core inflation.

Some important takeaways emerged from the overall inflation data.

a) Food inflation is still 0.6% higher on a sequential basis. While the vegetables and fresh fruits saw lower sequential inflation, cereals and dairy products saw higher inflation.

b) Fuel oil saw yoy inflation rise from 58% to 68%. That was largely offset by a fall in the prices of gasoline, electricity and piped gas supplies.

c) Core inflation fell by just 30 bps , but pressure came from oil related items like energy services, airline fares and transport related services. It is still about fuel prices.

d) YOY inflation is lower at 7.7% in October 2022 but high frequency MOM inflation for October 2022 is still fairly elevated at about 0.4%.

Let us quickly look at what this means for the Fed outlook and the India outlook. Inflation is still high at 7.7%, compared to Fed 2% target with MOM inflation still rising. However, Fed is likely to hike rates by just 50 bps in December and a few rate hikes of 25 bps each after that. The terminal rate is not too clear, but would be 5% or higher. What about India? Firstly, RBI has less to worry on monetary divergence. It can even pause having already raised repo rates by 190 bps. The risk of recession may recede and that is good news as India goes ballistic on its export thrust.