Concern for other economy is rising too with US inflation prints making a clear headway for FED to continue its rate hike spree.
US inflation numbers for the month of September came in at
40-year high rising 0.4% from previous month and rising 8.2% year on year.
The core consumer price inflation index print came in at
6.6% rise year on year. The core CPI excludes two components namely food and
fuel in order to smoothen out the rest of the numbers as both this component
show extreme volatility by their very nature.
These figures were at its highest since 1982 making them at
40-year high.
These figures solidified the concerns of the economists as
well as bankers about their view on how aggressive the FED will be in order to
control the inflation which is becoming more and more sticky month on month.
The problem is alarming thanks to the ever resilient numbers
coming month on month from the unemployment data and on the demand front. The
unemployment rate came in at 50-year low thanks to overarching resilient demand
on the consumption front which is making corporates to go for hiring spree even
paying fat cheques to retain the talent to meet the demand.
The FED has already raised interest rates by 3% points in
the current calendar year but still the inflation is not showing any signs of
cooling off.
But this is surely making it easier to expect again a 75
basis point rate hike in the upcoming November 2022 FED monetary policy
meeting.
The high inflation prints are burdening the US consumers and
burning their pockets with shelter, food as well as medical care indexes
contributing the highest share in the consumer price inflation index.
Meanwhile the social security administration announced 8.7%
hike in the social security benefits being given to the retirees. This is the
largest increase in the social security benefits announced since 1981 keeping
in view the inflation making highest prints in last 40 years. This increase is
a part of Cost of Living Adjustment famously known as COLA which will be in
effect from January 2023.
The inflation print from the US has its roaring effect on
all over the world including both on the advanced as well as developing
economies.
Whenever the FED increases the interest rate, it activates a
magnetic monetary field which starts pulling capital flows towards it from
other economies. This capital flight mainly impacts the developing world which
includes the emerging economies which are almost always susceptible to such
capital flights due to several factors including weaker sovereign credit
ratings, higher imports, weaker currencies and higher external debt. These all
are the common characteristics and not all economies in the emerging world show
all of the above traits but there is a confluence of different factors for
different economies depending on the nature of their economy.
According to the UNCTAD latest Trade and Development report,
one of the study shows how the increase in interest rates in the United States
will affect the Gross Domestic Product growth of the countries in the developed
as well as emerging world. According to that study, an increase in interest
rate of 1% by the United States results in reduction of Gross Domestic Product
by 0.5% in the developed economies and by 0.8% in the emerging economies. Now
in the current calendar year, the US has already increased interest rates by 3%
points which may transcend into a reduction of Gross Domestic Product by 2.4%.
As discussed earlier, one of the main factors which makes
the developing economies vulnerable to the interest rate hikes in the US is the
heavy external indebtedness. This can be seen in the external debt to exports
ratio in the developing economies, which is around 127%. So clearly the export
earnings which is mainly in US dollars are not sufficient for the repayment of
the debt stock with these countries.
How the developing economies with high external debt are
affected with hike in interest rates by US? Now mostly this external debt stock
includes interest payments and redemptions of principle amount in US dollars.
So all repayment includes US dollars. When the FED from the US increases
interest rates, it leads to increase in the demand of US dollars which results
in depreciation of the other currencies against US dollars. So the domestic
firms in these developing economies will need to shell out more of their
domestic currencies to buy US dollars for repayment of the external debt. This
will push several firms which are particularly sitting on heavy debt and are
focused on domestic economy having no export earnings to the brink of
bankruptcy and also acts as ripple effects throughout the economy.
Even in India, the Retail Inflation or Consumer Price
Inflation for the month of September reported at 7.41%. The Consumer Price
Inflation has remained above 6% for the ninth consecutive month i.e., for three
successive quarters.
The Reserve Bank of India (RBI) Act mandates the Monetary
Policy Committee of Reserve Bank of India (RBI) to have an inflation target of
4% with 2% variation on both upside and downside. This means that the Monetary
Policy Committee of Reserve Bank of India (RBI) will have to target their
policy decision such that the average Consumer Price Inflation stays within the
range of 2%-6%.
Which means that Reserve Bank of India (RBI) failed to meet
the inflation target mandate of 2-6% for three consecutive quarters and thus
will need to write a letter to the government explaining the reason for the
same and what steps will the Reserve Bank of India (RBI) take further to
correct the same.
The International Monetary Fund (IMF) in its report,
estimated global inflation figure to be at 8.8% for the current calendar year.
This means that globally central banks will be maintaining a tighter monetary
policy which will mainly include increasing interest rates. The matter of the
fact being, initiation will be from the advanced economy leaving no choice with
developing economies to follow the path in order to maintain interest rate
differentials.
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