Is Easing Inflation in the US Economy a Bellwether for the Rest of the World?

The American economy was one of the first major developed economies to fall sick with inflation. Furlough funds from the US government sparked an uncontrollable imbalance between demand and supply, forcing prices to spike. These price hikes soon shifted across the Atlantic and into mainland Europe.

The US Federal Reserve was forced to strengthen its resolve to tackling inflation. A steep interest rate hike cycle was embarked upon, strengthening the US dollar in the foreign exchange markets.

With the US dollar so strong against other major currencies like the British pound and the euro, nations heavily exposed to imports were starting to import more inflation into their own economies.

It's therefore reassuring for the rest of the world to see the US economy begin to win its fight against inflation. The latest CPI prints revealed headline CPI had dropped from 5.3% to 4.8%, with the annual rate of inflation falling to just 3%.

Month-on-month inflation growth of less than 0.2% is what’s needed to drive down annual inflation to the all-important 2% figure.

Is the surprise June CPI report enough to stop further Fed hikes?

After the US Federal Reserve opted to pause its interest rate hikes at its last major meeting, many pondered whether the current 5.25% bank rate would prove to be the Fed’s terminal rate.

One might be forgiven for thinking that this encouraging June CPI data would further underpin this theory.

Nevertheless, there is a feeling within Fed officials that a further 0.25% hike is needed to further choke consumer demand and ensure the economy continues to move toward disinflation.

The latest Federal Reserve meeting is one of the most eagerly anticipated events on the global economic calendar, followed by the press conference led by Federal Reserve chair, Jerome Powell.

There is a feeling that headline annual inflation could fall to 2.5% before the end of 2023, but this is unlikely to prevent interest rates peaking at 5.5% this month.

How does India’s inflationary picture compare with the US?

At the other end of the spectrum, India’s inflation battle looks like it’s still ongoing. Its recent June CPI prints found that annual inflation was up to 4.81%, above analyst forecasts but well below the Reserve Bank of India’s maximum tolerance limit of 6%.

Areas of concern for the Indian economy surrounded a rise in food inflation to 4.49%, caused by a surge in vegetable costs.

On the flip side, the country’s consumer food price index (CFPI) was considerably down year-on-year from its 7.75% figure in June 2022. Footwear and clothing inflation remained stubborn at 6.19% too.

Disruptions to perishable foods caused by extreme weather conditions are one of the main causes of sticky inflation in the Indian economy right now. In addition, the country’s labour market data does not appear weak enough to encourage monetary policy to shift towards a pivot on interest rates.

India’s interest rate has been held at 6.5% since February and the hawks on the monetary policy committee don’t look like they are ready to change course anytime soon.