US inflation at 6.32%

For October 2021, the US retail inflation came in at a 31-year high of 6.32%. It was a level last seen during the Gulf oil crisis in 1990. The higher inflation in the US has been triggered by supply chain constraints and imply that even the Fed could now look at front-ending the rate hikes. It is not just about taper, but about the Fed rates staying at 0.00-0.25% range when the retail inflation was shooting up to 31-year highs. That is hardly a sustainable scenario. 

India core inflation focus

One can ostensibly take comfort from the fact that India retail inflation for Oct-21 was just 13 bps higher at 4.48% but that would be to miss the point. While there has been slightly higher food inflation, the real villain was the sharply higher core inflation. Core CPI is the inflation that is left after removing the effect of food and fuel. This is the structural inflation that is much harder to manage. Core inflation for Oct-21 was up 31 bps at 6.11%. This is clearly the lag effect of supply chain problems and the downstream effects of high crude oil prices. This is going to worry the RBI more than headline inflation. 

IIP is becoming durable

If one looks at the IIP numbers for the month of Sep-21 (it comes with a lag of 1 month), then it is not too impressive at 3.06%. However, this is despite zero base effect and that is commendable. It also indicates that industrial growth is finally getting well above the pre-COVID levels. One can complain about the 2 lost years, but that is fait accompli. The fact is that the IIP is now less of a worry and is also capable of growing in the future at a sustainable and durable pace. In short, the RBI will have to give up its obsession for reviving industrial growth in its monetary policy stance. 

Focus will now shift to inflation

From a policy perspective, what this means is that inflation will take center stage going ahead. It would no longer be possible for MPC members to justify an accommodative stance on the growth revival story. That as a story is done and the monetary policy has done its best in the present circumstances. Now, further growth has to come from fiscal boost and from the normal industrial growth momentum in line with capital spending and consumption led growth. The focus will shift to inflation with core CPI being the major target of the RBI. We are likely to see a gradual shift in the MPC stance, focusing more on prices and less on growth revival. Like in the US, even in India, price stability is likely to take center stage in macro policy!