Can Inflation Come Down Sooner Than Expected? Maybe Yes!

  • Market Overview

The world is now fretting over soaring inflation as the Ukraine-Russia war has led to a scarcity of many agri commodities, metals and oil due to which their prices have recently gone through the roof. Economies relying heavily on imports of such commodities are witnessing multi-decade high inflation, with both the US and the UK seeing 40-year high inflation of 8.6% and 9.1%, respectively.  

Central banks worldwide have tightened up their sleeves and are moving with aggressive rate hike plans. In India, the RBI has already bumped up interest rates by 90 basis points this year (in two tranches), after the inflation numbers remained out of their comfort zone, while the US Fed has moved rates by 75 basis points to the North (in the last meeting) which is their most aggressive hike in the last many years. This high-pace liquidity squeeze from the system would not allow inflation to persist to higher levels for long. The recent CPI of 7.04% YoY in May in India has already retraced from the previous month’s high of 7.79%, which has already started to give some relief.

In a recent statement, Chief Economic Advisor to the government of India, Krishnamurthy Venkata Subramanian said that around 2% of the current 7%+ inflation in India is imported. Being heavily dependent on crude oil imports, it has been a major culprit. However, oil prices also seem to be easing, with Brent crude tanking below US$110 per barrel last week, which was the lowest level in a month.

More than oil, prices of natural gas have almost crashed from their highs this year. While natural gas futures was trading at a high of INR 749.6 per lot on the MCX earlier this month, it has now come down to INR 486 per lot, a massive plunge of more than half in less than a month. 

Other commodities futures on the MCX such as Nickel Futures is trading around the lowest level since 22 March 2022, copper is down to September 2021 level, and lead has fallen to the August 2021 low, with all of them down over 62.6%, 21.4% and 11.1% from their 2022 highs, respectively. In the international markets, prices of wheat , sugar , edible oil etc. have also retraced noticeably from their highs, which would play a crucial role in taming the soaring inflation

Government policies such as suppression of retail oil prices via excise duty cut, hike in iron and steel products export duty, a curb on sugar export etc. are also expected to not let go inflation out of control.

The icing on the cake is the expectation of a healthy and timely monsoon which would help to ramp up agricultural produce, further improving the supply side of the equation to bring down the rising prices. 

All in all, inflation has definitely surged to an uncomfortable level, putting a burden on households’ budgets, however, aggressive rate hikes, easing of commodity prices and timely arrival of monsoon would soon help in abating this rising burden on the pockets of people.

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  • Bipin Kochar @Bipin Kochar
    Very informative article - good job
    Like 0
    • Aayush Khanna/Investing.com @Aayush Khanna/Investing.com
      Thanks Bipin.
      Like 0
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