The recent US Inflation data and its impact on Indian economy ⚠️
• Inflation in the United States unexpectedly accelerated in May, putting pressure on the Federal Reserve to extend its aggressive string of interest-rate hikes and adding to the White House's and Democrats' political woes.
• According to Labor Department data released on Friday, the consumer price index jumped 8.6% from a year ago. The closely watched inflation indicator increased by 1% from a month ago, beating all expectations. The most significant contributors were shelter, food, and gas.
• The core CPI, which excludes the more volatile food and energy components, increased 0.6 percent from the previous month and 6% from a year ago, both exceeding expectations.
• The statistics show that inflation is still hot on many fronts, and that the Fed, which has promised half-point raises at each of its next two meetings, beginning next week, will have to keep that strong attitude through September.
• Inflation is expected to remain high in the coming months due to record fuel costs and geopolitical reasons, implying that the Fed will have to retain the brakes on the economy for longer.
• Following the release of the data, Treasury yields surged, stock futures plummeted, and the currency strengthened.
• There is a rising danger that price pressures in those sectors will worsen. The ongoing Russian war in Ukraine, as well as stepped-up associated sanctions; potential port disruptions owing to the imminent expiration of the West Coast dockworker contract; Covid-related lockdowns in China; and drought might all lead to rising food and energy prices.
• India would suffer as a result. The US Fed would be forced to keep raising policy rates if inflation remained high. As a result, capital flows to emerging markets, including India, would be affected.
• The rupee, which has already lost 5% against the dollar, might be further weakened if the Fed raises interest rates, causing capital outflows to accelerate.