US consumer inflation grows to 8.6% in May 2022

US inflation and what it means for India

by 5paisa Research Team Last Updated: 2022-06-13T15:21:01+05:30

Let me start with a rhetorical question; why does US inflation really matter to India? This is something we need to understand before getting into the details of US consumer inflation.

5 reasons why it matters ?

1. Food inflation in the US is normally reflective of global supply chain shortfalls. While Indian agriculture may still be insular, high food inflation does normally lead to excess of food exports out of India.

2. Fuel inflation in the US is a lot more reflective of the long term trend since the US is one of the world’s largest producer and consumer of oil. Hence, the impact of oil inflation in India is likely to be a multiple of the US impact.

3. Thirdly, high inflation levels forces the Fed to get more hawkish and the RBI will have to follow suit. We already saw that in an unscheduled meeting by the RBI in May 2022 to raise rates by 40 bps followed by 50 bps in June.

4. Surge in US inflation may also force the Fed to hasten the process of winding down the bond book to bring inflation under control by tightening liquidity. That is likely to have a negative impact on the passive fund flows into Indian equity.

5. Lastly, inflation gives a good basis to compare the real rates of interest in the US and in India and that shows that India seems to have an advantage. US inflation is higher than India but rates are lower. That is why debt outflows from India are still subdued.

Having understood the relevance of US inflation in the Indian macro context, let us look at the US May inflation in greater detail.

US inflation comes in higher at 8.6% for May 2022

OK, here is a small clarification. The Fed does not rely on this Consumer Inflation for its rate policy. That is determined based on Private Consumption Expenditure (PCE) inflation which is normally announced towards the end of each month. However, the consumer inflation does set the tone for the level of prices in the US economy. Here is how it panned out.
 

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For the month of May 2022, the consumer inflation came in 30 basis points above the consensus estimate of 8.3%. if you look at the last 3 months, the consumer inflation in the US was 7.9% in February, 8.5% in March and 8.3% in April 2022. The May 2022 inflation at 8.6% is the highest level of inflation seen in the US since December 1981.

US consumer inflation basket - May 2022

Broadly, the US consumer inflation basket is dividend into 3 sub-headers viz. Food inflation, Energy inflation and Core inflation. The table captures the gist of the inflation basket.

Category

May 2022 (YOY)

Category

May 2022 (YOY)

Food Inflation

10.10%

Core Inflation

6.00%

Food at home

11.90%

Commodities less food and energy

8.50%

Cereals and bakery products

11.60%

Apparel

5.00%

Meats, poultry, fish, and eggs

14.20%

New vehicles

12.60%

Dairy and related products

11.80%

Used cars and trucks

16.10%

Fruits and vegetables

8.20%

Medical care commodities

2.40%

Non-alcoholic beverages

12.00%

Alcoholic beverages

4.00%

Other food at home

12.60%

Tobacco and smoking products

7.90%

Food away from home

7.40%

Services less energy services

5.20%

Full service meals and snacks

9.00%

Shelter

5.50%

Limited service meals and snacks

7.30%

Rent of primary residence

5.20%

Energy Inflation

34.60%

Owners’ equivalent rent

5.10%

Energy commodities

50.30%

Medical Care Services

4.00%

Fuel oil

106.70%

Physician Services

1.10%

Gasoline (all types)

48.70%

Hospital Services

3.90%

Energy services

16.20%

Transport Services

7.90%

Electricity

12.00%

Motor vehicle Maintenance

6.10%

Natural gas (piped)

30.20%

Motor vehicle insurance

4.50%

Headline Consumer Inflation

8.60%

Airline Fare

37.80%

Data Source: US Bureau of Labour Statistics

Three trends emerge from the table above. Core inflation is marginally lower at 6%, compared to the previous month. Fuel inflation continues to be elevated and that can be largely attributed to the higher prices of crude oil, natural gas as well as electricity.

This has been a major driver of high inflation in the US in the last 6 months. Finally, the real crux of the problem is the food inflation which is spiralling out of control to a 16 year high at 10.10%. This contributes most of the incremental impact on inflation.

We get back to the India implications

The bad news is that US inflation is almost out of control and the only solution is adopt the Volcker kind of approach. The Fed will have to tighten much faster than originally expected as inflation is just not getting regulated.

On the positive side, the RBI has already pre-empted monetary divergence risk by hiking repo rates by a total of 90 bps in the last 1 months. It hiked by 40 bps in May 2022 and another 50 bps in June 2022. 

In the realm of macro policy, there is normally a huge gap between precept and practice. While India is preparing for the worst of global macros, it is still not clear if the US Fed would really act as hawkish as it claims to become.


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