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Is inflation really transitory as central bankers around the world have been telling us?
Food and energy prices have been rising around the world. In Mumbai, for instance, a litre of petrol now costs Rs 112.44 and diesel, Rs 103.26. The prices of coal have risen so much that many power plants are avoiding imports – one of the many factors for low coal inventory at generators today.
Globally, food prices are increasing. The FAO Food Price Index is up 32.8 percent from a year ago in September.
While the situation is better in India, not all is well. On Sunday, the Centre said it was releasing buffer stocks of onions to stabilise the prices of that vegetable. “Efforts are being made to soften the prices of potato and tomato," a government statement said.
Soaring fuel costs will also have second order effect in the form of increased logistics costs for firms. Rising food prices will pinch discretionary demand.
The shortage of everything from fertiliser to chips has been exacerbated by supply chain snarls. Companies from Asian Paints to Hindustan Unilever are weighing the trade-off between margin protection and volume growth. It is a tough choice when the market situation is fragile.
Higher inflation is telling on rural India and the farm economy. Earlier this week, after HUL released September quarter earnings, its boss Sanjiv Mehta said rural demand has moderated.
Things could get worse for the farm economy if the fertiliser shortage and higher input costs persist. If the situation does not improve, then it can hit rabi prospects, agriculture income and also contribute to food inflation. All said, inflation will remain a worry for some months.
What is leading to all these shortages in the first place? While it is tempting to blame it on the pandemic, the real reason is chronic underinvestment in the ‘old economy’, writes Jeff Currie, global head of commodities research at Goldman Sachs, in a piece in the Financial Times. (Free to read for Pro Subscribers). But for investment to revive, prices must stay higher for longer to give confidence to businesses, he writes. What does that imply, read to find out.
Our research team has also written the following notes rich with investing insights:
Weekly Tactical Pick: IRCON International
Asian Paints: Margins take a knock in Q2 as cost pressures bite
Havells India: Cost pressure surfaces, but growth remains robust
ICICI Lombard – Higher health claims, merger weigh on H1 earnings
Indian Hotels Ltd: Strong results, well positioned to play upcycle
JSW Steel: Cost pressure hurts
Strong show by TVS Motor in Q2 FY22, buy for long term
Syngene: Look beyond the near-term input cost pressure
What else are we reading today?
Bitcoin back in risk-on mode after ETF launch
Vaccination: A billion steps forward, but more to go
Herd Immunity Tracker: One-billion milestone reached, but vaccine hesitancy a concern
COP26 | If not net-zero, then what?
Technical Picks: BHEL, Federal Bank, GSFC and ICICI Bank (These are published every trading day before markets open and can be read on the app)
Ravi KrishnanMoneycontrol Pro