Why is the US inflation going up so sharply and do you see any impact on India?

For March 2022, US consumer inflation came in at a 41-year high of 8.5%. This sharply higher than 7.5% in Jan-22 and 7.9% in Feb-22. The inflation pressure was most visible in energy segment which saw 32% inflation on yoy basis but the other 2 important components of food inflation and core inflation were also at elevated levels. In a way, these inflation numbers ratify the Fed stance on being hawkish to control inflation.

Overall, the US energy inflation was 32%, food inflation was 8.8% and core inflation was 6.5%. However, the composition is more interesting. Fuel is up 70.1% yoy and gasoline used in cars is up 48% yoy. Similarly, airfares are up 23.6% while high protein foods are up 13.7% yoy. On a MOM basis, the Mar-22 inflation stood at 1.2%, compared to 0.8% in Feb-22 and 0.6% in Jan-22. Energy was up 11% on a sequential basis and the real inflation bully.

For the Fed, this only justifies why they have been hawkish despite the war. Fed hawkish stance is reflected in the Mar-22 FOMC minutes. Rates are likely to be hiked 50 bps in May and overall 200 bps more by end of 2022. Fed has made it crystal clear that it would focus on a hawkish policy of raising rates and simultaneously also unwinding the bond book at a gradual and modulated pace of $95 billion of bonds per month from May.

What does this mean for India? Like the US, India also contends with higher inflation and now it is confirmed that Fed will be ultra-hawkish. The risk of monetary divergence is just too large for the RBI. Perhaps, RBI can wait till May-22, but if the Fed implements its monetary hawkishness, then RBI has limited choice. If the RBI is not keen to put up with monetary divergence, the only option is a spate of aggressive rate hikes in India too.