Inflation flares up again in America: CPI increased to 3.7% in September, huge increase of 9.1% in gasoline increased Fed’s concern; What will be the impact on global markets including India?

The efforts of the US Federal Reserve (US Fed) to limit inflation to the target of 2% in the world’s largest economy have once again suffered a setback. According to the latest data released by the US Bureau of Labor Statistics (BLS), the annual retail inflation rate based on Consumer Price Index (CPI) in the month of September 3.7% Has been registered.

Market analysts and economists were expecting that due to monetary tightening, inflation would moderate further and come down to 3.6%. However, it exceeded expectations and remained at the same level as last month’s 3.7%. On a month-on-month basis, CPI has registered an increase of 0.4%, which clearly indicates that the inflationary pressure in the US economy has not yet completely calmed down.

The biggest contributor to inflation remaining high in the month of September was the energy sector, especially automobile fuel. Gasoline Is of:

• Gasoline index jump: Gasoline prices on a month-by-month basis A sharp jump of 9.1% Was recorded. The direct impact of the rise in crude oil prices in the international market was seen on American gas stations.

• Overall Impact of Energy Index: The Energy Index had an overall monthly increase of 5.6%, which kept the headline CPI from falling.

• Shelter and Housing Costs: Housing costs (Shelter Index) also continued to rise and increased by 0.6% on a monthly basis. Housing costs account for more than one-third weightage in the overall CPI basket, so high rental rates also supported inflation.

In contrast to headline inflation, food and energy components, which are considered more volatile, are measured separately. Core CPI Slight softening was observed in:

• Core inflation declines to 4.3% on annual basis in August 4.1% Which is the lowest level since September 2021.

• On a monthly basis, core CPI increased by 0.3%.

• The decline in core inflation signals that the excessive surge in prices of service sector and manufactured goods has been somewhat restrained, but service sector wages and rent costs still remain well above the Fed’s comfort level.

This data has posed a new challenge to the policy-makers of the US central bank Federal Reserve:

1. Risk of another rise in interest rates: The Fed has already lifted its benchmark policy rates to a 22-year high (5.25% – 5.50%). If energy and services prices continue to rise at this pace, the Fed may consider raising rates by another 25 basis points (bps) before the end of the year.

2. Possibility of cut postponed: Wall Street and global financial markets had expected the Fed to begin cutting interest rates by mid-2024. But sticky inflation of 3.7% sends the message that rates will remain higher for longer.

3. Rise in US bond yields: After the arrival of this data, the US 10-year Treasury yield was seen strong, which also supported the Dollar Index (DXY).

The rise in US inflation has a direct impact on all emerging markets including India:

• Selling by Foreign Institutional Investors (FIIs): When bond yields and interest rates remain high in the US, foreign investors book profits from the Indian equity markets and turn to the safe US debt market, which may increase volatility in the domestic stock markets (Sensex and Nifty).

• Pressure on Rupee: The Indian Rupee (INR) exchange rate may remain under pressure due to a strong dollar, which risks making India’s crude oil and electronics imports costlier.

• RBI’s stance: The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.50% in the recent monetary review. However, if the Fed keeps rates high for a long time and international crude oil prices remain around $90 per barrel, the central bank in India too may have to postpone its rate cut plans for a long time.