India will not catch a cold when U.S. sneezes this decade

India will not catch a cold when U.S. sneezes this decade

US Inflation Continues To Cool, But Here’s What is Hidden under IceBerg.

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17 min read

View About recent US inflation data.

In March, the core inflation rate, which is the measure that excludes the volatile items of food and energy, rose by 0.4%, which was in line with expectations and less than the previous month's increase of 0.5%. However, it is worth noting that the prices were still 5.6% higher than the levels seen a year ago. This suggests that inflationary pressures are still present in the economy, but they have not yet reached concerning levels.

CPI

Interestingly, the core inflation rate was higher than the headline inflation rate, which is a measure of all items in the consumer price index (CPI), including food and energy. In March, the headline inflation rate increased by 5% compared to the same period a year earlier, which is primarily due to the sharp decline in energy prices. Energy prices had surged in the previous year following Russia's invasion of Ukraine, leading to higher headline inflation.

US inflation has been a concern in recent years. Inflation in the United States has soared from 1.4 per cent in January 2021 to a high of 9.1 per cent in 2022. However, as of April 2023, the US annual inflation rate had reduced to 5% last month, which is the slowest pace for price increases since 2021, when they first began to climb. It is important to note that the Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, and indexes are available for the US and various geographic areas.

Housing Cost Issue

Regarding the components contributing to the rise in prices, housing costs have been the most significant contributor in recent months. However, housing costs are considered to be the most lagging indicator, and the impact of recent increases may not be immediate. Additionally, housing costs are expected to cool off in the coming months, primarily due to higher mortgage rates, which are expected to decrease demand for housing.

According to recent data and reports from US government authorities, inflation in the United States has remained high and widespread since early 2021 12. The Consumer Price Index (CPI), which is the most widely used measure of inflation, rose by 0.8% in February 2022, up 7.9% over the last twelve months 3. In December 2022, the inflation rate fell again to 6.5% on an annual basis, according to the consumer price index, down from 7.1% in November and a peak of 9.1% in June 2022 4. The index for all items, less food and energy, increased by 0.5% in February (SA), up 5.5% over the year (NSA) 5.

PCE View

The personal consumption expenditures (PCE) price index is another measure of inflation. According to the St. Louis Fed, annual inflation, measured by the 12-month change in the PCE price index, surpassed 2% in March 2021 and has remained above 6% since December 2021 2.

It is worth noting that the core PCE price index, which excludes two volatile categories to reveal underlying inflation, also measures inflation in the prices paid by people living in the United States and can compare price levels across states or metro areas 1. Inflation increases the prices of goods and services over time, which can lead to higher costs of living, decreased purchasing power, and overall economic instability.

While inflationary pressures are present in the economy, they have not yet reached worrying levels. The core inflation rate, which is a more reliable indicator of underlying inflationary pressures, is relatively low. The recent increase in housing costs may not have an immediate impact, and the market is expected to cool off in the coming months.

Major Factors Affecting Inflation

Inflation is a critical economic indicator that measures the rate at which prices of goods and services in an economy are increasing over time. The impact of inflation can be significant, affecting a country's growth and stability.

Monetary Policy

Monetary policy - Central banks can adjust interest rates to regulate the money supply, which in turn can impact inflation. For example, the US Federal Reserve has a dual mandate to promote maximum employment and price stability. In 2021, the Fed projected that inflation would be around 2.4%, up from the previous year's estimate of 1.8%.

Fiscal Policy

Fiscal policy, involving government spending and taxation, can also impact inflation. For instance, the US government passed a $1.9 trillion relief package in response to the COVID-19 pandemic. Such increased government spending could lead to higher inflation if not matched with increased production or economic growth. Additionally, a reduction in taxes can stimulate economic growth, but it can also lead to higher inflation if not accompanied by a corresponding increase in production.

Exchange Rate

Exchange rates can also impact inflation. In 2020, the US dollar weakened against many currencies, leading to a rise in commodity prices and higher inflation. For example, the price of oil increased by more than 200% between April 2020 and April 2021.

Commodity Prices

Commodity prices, such as oil and food, can also impact inflation. For example, in 2021, the price of corn increased by nearly 90%, leading to higher prices for products made from corn, such as cereal, snacks, and ethanol.

Global Economic Conditions

Global economic conditions can also impact inflation, particularly in the case of a recession or slowdown, which can lead to lower inflation due to reduced demand. In 2020, the COVID-19 pandemic led to a global recession, resulting in lower demand and lower inflation. However, as the global economy recovers, inflation rates are expected to increase.

Oil Prices

In 2022, the price of oil experienced a significant increase in the first half of the year but generally declined in the second half of the year. On the final trading day of 2022, the spot price of Brent crude oil, a global benchmark priced in Northwest Europe, closed at $85 per barrel, $7 higher than the price on January 3, 2022 ($78/b). Forbes reported that oil prices slowly recovered since the start of the pandemic, topping $120 in the summer of 2022. Prices have since dipped below $100, and OPEC plans to cut production as a result.

Furthermore, on March 4, 2022, Russia's attack on Ukraine caused oil prices to increase from around $76 per barrel at the start of the year to over $110 per barrel.
The outlook for oil prices in 2023 is expected to be positive. The US has confirmed that it will start replenishing its Strategic Petroleum Reserves (SPR) at a price between $68 and $72, which could provide further support for oil prices in the future. As of March 27, 2023, the Brent crude oil price stood at $78.12 per barrel, compared to $72.8 per barrel for WTI oil and $75 per barrel for the OPEC basket. The US Energy Information Administration (EIA) forecasts that the Brent crude oil price will rise from an average of $81 per barrel in December 2022 to an average of $83 per barrel in the first quarter of 2023. Additionally, OPEC+ has announced that it will reduce output by 1.16 million barrels per day from May until the end of 2023, which could positively impact prices. However, several factors are at play in determining the short and medium-term trend in oil prices this year.

View about US Economy in 2025

Here are a few potential predictions for the US economy:

  1. Increasing automation and artificial intelligence could lead to significant job losses and economic inequality. While these technologies are expected to increase efficiency and productivity, they may also result in the displacement of human workers, particularly in industries like manufacturing and transportation. This could exacerbate existing economic inequalities, as workers without the skills to adapt to new technologies may be left behind.

  2. The US government's plans to boost the economy through public works projects and social programs may lead to increased government debt and inflation. While these plans are intended to provide short-term economic stimulus, they may have long-term consequences for the economy, particularly if they are not accompanied by measures to control inflation and reduce the deficit.

  3. The ongoing trend towards digitalization and remote work may lead to the decline of traditional office spaces and a decrease in demand for commercial real estate. This could have significant economic impacts, particularly in cities where commercial real estate is a major source of revenue. It may also lead to changes in urban planning and transportation infrastructure.

  4. The ongoing effects of climate change could lead to significant economic disruptions, including rising sea levels, more frequent natural disasters, and changes in agricultural productivity. These disruptions could lead to significant economic losses, particularly in vulnerable areas like coastal cities and agricultural regions.

  5. The emergence of new technologies, such as blockchain and cryptocurrency, could disrupt traditional economic systems and lead to significant changes in the financial industry. While these technologies have the potential to increase efficiency and reduce transaction costs, they may also create new risks and uncertainties in the financial system.

It is important to note that these predictions are not certain and should be taken with a grain of salt. The future of the economy is always subject to change, and it is difficult to predict with certainty how these trends will play out.

One of the significant trends that could shape the US economy in 2025 is the continued growth of the renewable energy sector. The demand for clean energy has been increasing, and this trend is expected to continue. According to the International Energy Agency (IEA), renewable energy is projected to be the fastest-growing source of electricity generation over the next five years, with solar and wind energy leading the way.[1] This shift towards renewable energy is likely to create new jobs and spur economic growth in related industries.

Another trend that could impact the US economy in 2025 is the ongoing digital transformation. The COVID-19 pandemic has accelerated the adoption of digital technologies, and this trend is likely to continue. Many businesses have shifted to remote work, and online shopping has become increasingly popular. This digital transformation is expected to continue with the rise of automation and artificial intelligence. While this will lead to increased efficiency and productivity, it may also result in job losses and economic inequality.

The US economy is also expected to face demographic changes in the coming years. The ageing population and declining birth rates are likely to have significant economic impacts. According to the US Census Bureau, the number of people aged 65 and older is expected to increase by 35% between 2020 and 2030.[2] This demographic shift could lead to increased demand for healthcare and social services, as well as changes in consumer behavior and spending patterns.

The global economy is likely to have a significant impact on the US economy in 2025. The ongoing trade tensions between the US and China, as well as other geopolitical risks, could lead to economic uncertainty and volatility. The US will need to find ways to remain competitive in the global market, particularly in emerging industries like artificial intelligence, biotechnology, and renewable energy.

The US economy in 2025 is likely to be shaped by several trends, including the continued growth of renewable energy, the ongoing digital transformation, demographic changes, and global economic factors. While there is uncertainty about the future, these trends are likely to have significant impacts on the US economy and will require thoughtful planning and strategic investments to ensure long-term economic growth and stability.

Inflation Situation in India

2020

Inflation in India was already a concern before the COVID-19 pandemic hit the country. However, due to the pandemic, inflation rose to a 16-month high of 7.61% in October 2020. The main reason for this rise was the increase in food prices, which account for a significant proportion of the Consumer Price Index (CPI). The lockdowns and supply chain disruptions caused by the pandemic led to a shortage of food supply, resulting in a sharp increase in food prices.

2021

Inflation in India continued to remain high in 2021. The RBI (Reserve Bank of India) projected that inflation would remain above 5% until September 2021. The main reason for this was the continued increase in food prices, along with the increase in fuel prices. The RBI kept the policy rate unchanged at 4% to support growth and maintain inflation within the target range.

2022

Inflation in India is expected to remain high in 2022. According to the RBI, inflation is projected to be in the range of 5.2-5.4% for the first half of 2022. The main reason for this is the continued increase in food prices and the rise in global commodity prices, which will lead to higher input costs for businesses. The RBI is expected to maintain an accommodative stance to support growth while keeping inflation under control.

2023

Inflation in India is expected to ease in 2023. According to the RBI, inflation is projected to be in the range of 4.3-4.7% for the second half of 2023. The main reason for this is the expected improvement in food supply and the easing of supply chain disruptions. The RBI is expected to continue its accommodative stance to support growth while keeping inflation under control.

Inflation has been a persistent challenge for the Indian economy in recent years, impacting the standard of living of the people and the overall economic growth. The year 2022 and 2023 are expected to see some trends in inflation in the Indian economy, which are mentioned below.

Inflation in India is expected to remain high in 2022, primarily driven by the increase in food prices and the rise in global commodity prices. The Indian economy is heavily dependent on imports for its fuel, which is expected to remain high in the coming year, leading to higher input costs for businesses. The supply chain disruptions caused by the COVID-19 pandemic have also resulted in a shortage of food supply, leading to higher food prices. The Reserve Bank of India (RBI) is expected to maintain an accommodative stance to support growth while keeping inflation under control.

Inflation in India is expected to ease in 2023, primarily due to the expected improvement in food supply and the easing of supply chain disruptions. The Indian government has taken measures to increase food production and improve the supply chain infrastructure to ensure adequate food supply. The RBI is expected to continue its accommodative stance to support growth while keeping inflation under control. However, the rise in global commodity prices may continue to impact the Indian economy, leading to higher input costs for businesses.

Inflation trends in the Indian economy in 2022 and 2023 are expected to be driven by several factors, including the increase in food prices, the rise in global commodity prices, and supply chain disruptions caused by the COVID-19 pandemic. The Indian government and the RBI are taking measures to address these challenges and maintain inflation within the target range while supporting economic growth. It is essential to keep a close watch on inflation trends and take timely measures to address any challenges that may arise.

Challenges Faced by RBI to Curb Inflation

The RBI faces several challenges in curbing inflation in India, which are discussed below:

Food Inflation

Food inflation is one of the major challenges faced by the RBI in curbing inflation in India. Food prices account for a significant proportion of the Consumer Price Index (CPI) and are heavily influenced by supply-side factors such as weather conditions, production, and storage facilities. The RBI needs to work closely with the government to address supply-side challenges and ensure adequate food supply to keep food prices in check.

Fuel Prices

Fuel prices are another significant contributor to inflation in India, as the Indian economy is heavily dependent on imports for fuel. The rise in global crude oil prices leads to higher input costs, which are passed on to consumers, leading to higher inflation. The RBI needs to maintain an accommodative stance while keeping a close watch on global crude oil prices to ensure that fuel prices remain within the target range.

Structural Reforms

Structural reforms such as improving the supply chain infrastructure, increasing competition, and reducing regulatory bottlenecks can help address the root cause of inflation in India. The RBI needs to work closely with the government to implement these reforms and ensure that they are effectively implemented.

Monetary Policy

Monetary policy plays a crucial role in controlling inflation in the economy. The RBI needs to adopt an appropriate monetary policy stance, including setting interest rates, to maintain price stability in the economy. The RBI needs to balance the need to support economic growth with the need to control inflation.

Facts on how US inflation and economic issues affect India:

  1. In India, the inflation rate is typically calculated on a year-on-year basis. If the inflation rate for a particular month is 10 per cent, it means that the prices in that month were 10 per cent more than the prices in the same month a year earlier.

  2. The Indian economy already witnessed a 5.59 per cent (YOY) inflation in December 2021. With the rise in global prices, India might import more.

  3. Apart from the lowdown on India’s prices, experts believe that a recession is likely because of the US's record inflation.

  4. The sharp rise in commodity prices across the world is a major reason behind the inflation spike in India. This is increasing the import cost for some of the crucial consumables, pushing inflation higher. Brent crude prices crossed $65 per barrel in May 2021, more than double of what it was a year ago.

  5. The US dollar is the world's most dominant reserve currency, and fluctuations in its value can impact the Indian economy.

  6. The US Federal Reserve's monetary policies, such as interest rate changes, can affect India's capital flows, foreign exchange rates, and, thus the overall economic growth.

  7. The US's economic slowdown can lead to lower demand for Indian exports, which can hurt India's trade balance and overall economic growth.

  8. The US's economic policies, such as trade tariffs, can impact India's exports and domestic industries, which can affect the overall economic growth.

  9. The US's monetary policies can impact global oil prices, which can affect India's oil import bill and overall inflation.

  10. A high inflation rate erodes the purchasing power of people in India, and since the poor have less money to withstand fast-rising prices, high inflation hurts them the hardest. However, a moderate level of inflation is required in the economy to ensure that production is promoted.

Indian GDP growth rate

Proposed plan on how India can tackle the economic problems faced by the US:

The United States is facing several economic problems, including high inflation, rising debt, budget deficits, and slow economic growth. These problems have a significant impact on the global economy, especially India's economy, which has strong economic ties with the US. In this context, it is crucial for India to take steps to tackle these economic problems faced by the US.

Encouraging Exports to the US

One way India can tackle the economic problems faced by the US is by increasing its exports to the US. India is a major exporter of goods and services, and the US is one of its largest trading partners. By increasing its exports to the US, India can create new markets for its products and services, which will help offset the impact of the economic problems faced by the US.

Investment in US Treasury Bonds

Another way India can tackle the economic problems faced by the US is by investing in US Treasury bonds. This will not only help India earn a better return on its investment but also help stabilize the US economy. By investing in US Treasury bonds, India can help finance the US government's debt, which will help reduce the budget deficit and support economic growth.

Promoting Economic Cooperation

India can also tackle the economic problems faced by the US by promoting economic cooperation between the two countries. This can include joint ventures, technology transfer, and other forms of economic cooperation that can help create new business opportunities and expand trade and investment between the two countries. By working together, India and the US can address common economic challenges and find solutions that benefit both countries.

Reference Books

Conclusion

The economic problems faced by the US have a significant impact on the global economy, including India. By taking correct decisions on global economic issues, India can not only protect its own economy but also contribute to the stability of the global economy. The growth opportunity is still very high in developing economies like India. India must seize this opportunity to pave its way to be a global superpower.

Any information or communication I provide is for educational or informational purposes only and should not be construed as investment advice. It is important to conduct your research and seek the advice of a professional financial advisor before making any investment decisions. Any investment you make is solely at your own risk, and I am not liable for any losses or damages that may occur as a result of your investment decisions.