Overall consumer prices in October 2021 in USA rose 6.2% year-on-year, the largest increase in three decades since November 1990, and rose 0.9% over the previous month. Higher consumer prices were “broad-based,” as per the Bureau of Labor Statistics (BLS), with substantial increases seen in the indexes for energy, rent, food and vehicles.
If we remove the inflation of volatile food and fuel prices from the overall consumer prices – the so-called core inflation – the picture though looks somewhat brighter, it is still worrying. The US core inflation climbed by 4.6% over the last 12 months, the biggest gain since August 1991. And that’s well above the Federal Reserve’s (Fed’s) 2% inflation target. The exponents of the “transitory” high inflation theory have been unable to explain such persistently high consumer prices.
India’s retail inflation rate, which is measured by the Consumer Price Index (CPI), rose to 4.48% in the month of October 2021, as per data released on Nov. 12 by the Ministry of Statistics and Programme Implementation (MoSPI). The rise in CPI inflation in India is being driven more by an increase in fuel costs along with an increase in some components of the food basket, which hurts the common people the most. According to the data released by the National Statistical Office (NSO), ‘oils and fats’ prices zoomed 33.5%, while inflation in the ‘fuel and light’ category rose to 13.63% in October 2021. Clothing and footwear inflation was 7.53% in October, up from 7.2% in September.
Though India’s consumer price inflation for the latest month was within the broad comfort zone of the Reserve Bank of India (RBI) – between 2% and 6% – it is a concern that the high inflation predates the pandemic in India. India’s retail inflation has stayed worryingly above or near the RBI’s upper limit for the better part of the last two years. The fact that India’s inflation has stayed high even when demand hasn’t recovered is an indicator of a possible hyperinflation as and when demand fully recovers. RBI has projected the CPI inflation at 5.3% for 2021-22.
Both demand and supply factors are at play for the high inflation globally. Post a rapid rollout of the Covid-19 vaccination drive, an unexpectedly fast recovery in all-round demand from consumers in the US contributed in part to the inflationary spike. This inflationary pressure was further fueled by billions of dollars pumped by the US government to provide relief to those who lost their jobs and to stimulate demand.
While the demand has recovered swiftly, supply hasn’t kept pace. Supply chain issues continue to mess with the availability of goods, leading to high prices. Today, millions of products – cars, washing machines, smartphones, and more – rely on computer chips, also known as semiconductors. And right now, there just aren’t enough of semiconductors to meet the industry demand. On account of shortages in shipping containers, global supply chains are severely affected.
Labor issues are another contributing factor for the global supply constraints. Tens of millions of workers in US, India and in many other countries lost their jobs or left their jobs during the pandemic and lockdowns, which resulted in a lot lesser quantity of goods being produced. Many of these left workers have not returned back to their jobs and some of them may never return.
When global prices increase, it will lead to higher imported inflation for India – everything that India imports will become costlier. The global prices of commodities like crude, steel, cement, aluminum etc have witnessed a sharp increase on the back of demand revival in advanced economies driven by the rollout of Covid-19 vaccines. High global prices of commodities will push up construction, capex and consumer durable costs for India.
Persistent high inflation in the US will likely prompt the Fed to abandon their loose monetary policy – leading to higher interest rates and higher production costs globally. Rising bond yields in the US would narrow the interest differential between the US and India, and could in turn trigger a depreciation in the rupee value. Decline in rupee value increases the rupee cost of imported commodities for India and may in turn transmit into a broad-based price rise in the country.
A high inflation rate erodes the purchasing power of common people. A high inflation hurts the poor the hardest, since the poor have less withstanding capacity to face fast-rising prices. And it looks – the world, including India, may have to live with high inflation for a long time to come.
The views and opinions expressed in this article are those of the author.
The author is an alumnus of IIM, Ahmedabad and a retired senior corporate professional.