Moneycontrol Pro Panorama | Inflation is easing, or is it?

A statistical effect is expected to bring the headline inflation below 5 percent.

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Inflation is back on our minds. We would know how prices behaved in India last month later in the evening when the consumer price index (CPI) inflation for April is released. But largely, a statistical effect is expected to bring the headline inflation below 5 percent. Indeed, after a punishing two-year trend of price surges across the globe, inflation is easing in pockets.

Earlier this week, data showed retail inflation in the US cooled to 4.9 percent last month led by a drop in shelter inflation and services. The internals were mixed, though and beyond the headline prices seem to be cooling slower than what policymakers would want.

Inflation across the pond isn’t a pretty sight yet and the UK is struggling with notoriously high energy prices for the past two years with no end in sight. UK inflation is still holding near 46-year highs, and the Bank of England served another rate hike on Thursday and said it expects prices to fall more slowly than anticipated before. Clearly, the developed world’s relief on inflation is yet to arrive.

In Asia, however, prices have fallen far more, giving the much-needed reprieve to policymakers from hiking rates further. From China to Thailand, inflation is near multi-month lows and expected to ease further. The trend is expected to continue in the coming months as well. The fast-paced and unintentionally co-ordinated rate hikes by central banks across countries seems to have finally had the desired effect on prices. Also, even as a war between Russia and Ukraine continues, supply chains have been restored to a healthy level which is another cooling effect on prices. It shouldn’t be a stretch to expect prices to crawl back to reasonable levels.

Here is where we need nuance. There is nothing more deceptive than an obvious fact as British writer Arthur Conan Doyle said. Inflation makes consumers, businesses, governments and companies behave differently and that in turn has implications on the outlook for prices. Most companies have continued to safeguard their profit margins, demonstrating pricing power and perhaps the reason inflation is easing slower. As we wrote on Wednesday, the profits of NSE200 stocks have grown by around 9 percent (+21 percent ex commodities) according to an ICICI Securities report.

Inflation is changing the fashion industry. As a Bloomberg piece noted few weeks ago, during tight times, everyone wants to dress like the top 1 percent.

What about the bottom? Tim Harford at Financial Times has this intriguing piece detailing the Giffen goods concept. The idea is that consumption of some goods increases as their prices increase because overall inflation becomes punishing for the consumer. Essentially, Giffen goods concept is one of substitution. But this concept unravels for the bottom half of the population as poor citizens are already consuming the cheapest goods. For them, substitution does not work.

The only solution is increasing incomes and that comes from economic growth. A tightening monetary policy is loathed by all because it brings down economic growth. While India’s businessmen, its middle-income population that spans everyone from a stockbroker to an IT executive, have reasons to loathe interest rate hikes (profit margins suffer and monthly loan repayments bloat), it is the poor that benefit from the cooling of prices.

But here again, the consumption basket of the poor is largely staples such as food, and monetary policy has little to no effect on them.

The recent fight against inflation has seen the credibility of central banks erode globally. Central banks may have to rethink their approach to inflation in a world that is fragmented by de-globalisation. Interest rate as the instrument isn't enough anymore to achieve price stability. Both the Fed and the BoE have realised that. For India, the Reserve Bank of India’s institutional experience with multiple objectives gives it an edge.

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Technical Picks:  Vedanta, JSL, Delta Corp, Hindustan Unilever andCopper (These are published every trading day before markets open and can be read on the app). 

Aparna Iyer
Moneycontrol Pro