Is Retail Inflation Transient? The inflation in the US has been edging higher during the last few months, and the latest data indicates that it is stable at higher levels. The US CPI registered a rise in July to the tune of 0.50 % on a month-on-month basis, the annual inflation rate at 5.40 %, and the core inflation at 4.30%. The headline inflation in June was at the same level in June while the core inflation was a shade higher at 4.50%. It looks like inflation is probably stabilising at these levels with some variability here and there over time. It also rules out the probability of inflation moving any higher from here. Inflation is more widespread and deeper now with the trend seen in the prices of a larger number of goods and services. Housing costs, medical care, recreation costs, apparel prices. There is a kind of spreading out of the price pressures into more commodities. The price developments have been quite in line with expectations. The cause of inflation is that demand is outstripping supply, and the pandemic-led supply disruptions, and the truncated ability to revive production, have caused much of this price spiral. While we may not see the inflation rate going up from this level, it may, in all probability, sustain near around these levels for a longer time. That would be a signal for action. Yet another factor that adds to the evolving situation is the developments on the employment front. On the employment front, the numbers show scarcity of hands. Interestingly the number of small businesses that are facing labour shortages is relatively higher this time around, and the issue is serious as they are not able to find people locally. Even at the national level, the job openings outnumber the actual hiring. This adds to labour costs and results in high product prices and inflation. One component which is of special significance is the housing costs in the US which is also on an upward spiral and it has weightage of 30 % in the price index. Any rise in housing costs is bound to stay at high levels longer than expected as the trend in the past has been so. While this component may not push up prices much, it will prevent the price level from coming down, and hence, inflation may not be transient. Some of the simple yet profound factors may result in a Fed action earlier than expected, and most likely by early 2022 as things stand at present. Can anything completely change this narrative and turn it on its head? Unless the pandemic becomes a major destabiliser again, the economic revival is going to sustain itself and the higher price level too. This may warrant policy action.
China Slows down!! China has witnessed forex outflows during the last month and it is set to continue. The main reason for this is the tightening of the regulatory regime on tech companies, education, and similar businesses. The increased regulatory surveillance covered areas like cybersecurity, data security etc. apart from those mentioned earlier. The sudden suspension of Ant Group’s US$ 35 Billion listing and the anti-trust fine of US$ 2.80 Billion on Alibaba, have been watched by the global community as synonymous with increasing state controls reflecting the different mode in which China is operating in comparison to the free world. In recent weeks, tech and education stocks have sold off as the country increased regulatory oversight further. This has resulted in clearly negative sentiment, within China some of these measures are considered essential to strengthen the local governance and economy. But the economic numbers from China are not so encouraging compared to the positions three months back or even one year back. There is a notable sluggishness that is setting in, and this may get accentuated by the fresh wave of the more potent variant of the pandemic. The Q2 GDP growth was at 7.90 %, and it looks set to decline to low single digit. 3% or 4 % due to the ongoing travel restrictions and lockdowns in China to contain the spread of the pandemic. This also means that the quick recovery and the high growth rate seen since the middle of 2020 is gradually coming to an end and growth in China may mirror the average Asian growth of close to 5 %. This has consequences for the global economy too, not just in terms of trade but in terms of the potential for growth. If supplies of critical components and goods from China becomes dry, then the prospects of further price inflation in certain commodities becomes a more potent eventuality.
