Yesterday, the US came out with its July 2022 inflation data , surprising the street with a noticeable drop to 8.5%, from a 41-year high of 9.1% in June 2022. Tomorrow, India is all set to report its July 2022 CPI (consumer price index) data which is expected to continue the ongoing downtrend.
Image Description: Inflation trend of India for the last 1 year (the last bar is a forecast for July 2022)
Image Source: Investing.com
For the last two months, the country’s inflation rate has fallen from 7.79% in April 2022 which was the peak of the year (so far) to 7.04% in May 2022 to 7.01% in June 2022. In July 2022 as well, the inflation rate is expected to come down as food prices continued to fall last month. Food inflation had already started easing in June 2022, especially with the softening of edible oil prices, and deepening deflation in pulses and eggs. However, a higher benefit would be seen from a plunge in the oil prices in the international markets. Looking at a close-to-close basis, brent crude has seen a fall of around 4.1% in July 2022 over the previous month, while there have been a few days when it even plunged below the US$100 per barrel mark. Easing gas prices was one of the primary reasons for a drop in US inflation last month.
The government’s intervention to control soaring inflation would also start to materialize its results. When the government or the RBI frame fiscal and monetary policies, respectively, their effect does not materialize immediately. On the ground level, there is a lag of a few months (at least) for these economic policies to start showing results. Hence measures that were taken in May 2022 via slapping an export duty on steel and iron ore products would be seen in the coming numbers. A few months back, the government also took a decision to ban the export of wheat to increase food security and tame inflation, which would also likely reap benefits in July’s 2022 inflation numbers. Not to forget the major move of cutting excise duty on fuel and the RBI’s rate hike of 50 basis points on 8 June 2022 would play a humongous role in taming inflation.
However, the record low of the rupee against the US dollar might prove to be a devil. In July 2022, the USD/INR rose to a record high of 80.23, although there has been some correction seen in the pair after mid-July 2022. Again looking at a close-to-close basis, the pair rose around 0.48% in July 2022 over the previous month.
The last two month’s data has shown that the worst is probably behind us and the trajectory of inflation would likely to see a downtrend. Economists are expecting a drop in inflation to 6.78% in July 2022. However, despite aggressive rate hikes and the government’s measures, the RBI still projects inflation to remain above the upper tolerance level of 6% through the first three quarters of 2022-2023.
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I don’t think that the worst is behind us. Especially energy prices and the USD. I also see metals like commodities going up . Rationale:1. FED will continue to increase the interest rate ane also QT, until CPI and core comes down by 200% from the latest. Resultant strong $ weaker₹. 2. Europe is already short of 35% of energy even before the fast approaching winter, unless Russia relents, the demand will outbeat the supply more and more. This will result in higher crude and gas. Before the winter, with the ongoing food grains crisis, inventories are piled higher in storages, so food prices will go up. 3. Because of higher energy prices, cost of prodction of smelting will go up, leading to highly reduced supply albeit softened demand, metals will climb up. Therefore, inflation genie will stay through for a few more quarters. The lagging indicators of massive fed hikes started a quarter ago, will start playing in from now, we will see excess liquidity vanishes in risky assets.Like 0