INFLATION - ANT IN THE PANTS

The US sneezed and the Indian markets caught a cold. That’s how it seems to be today in the globalized world that we live in.

Yesterday night, the US Govt released its Consumer Price Index (CPI), which had soared to 6.2% - the biggest YoY jump in 31 years, delivering widespread price increases for everything from groceries to cars due to supply shortages and strong consumer demand. Food prices for both groceries and dining out rose by the most in decades. Price increases were broad-based, with higher costs for new and used autos, gasoline and other energy costs, furniture, rent and medical care. Prices fell for airline fares and alcohol.

Once the CPI came out, the US stocks tanked and bond yields rose. Faster-than-anticipated but uneven economic recovery, trillions of dollars in pandemic-related government stimulus and surging consumer demand across almost all goods – boosted by Govt stimulus and improving job market has kept US CPI well over 5% for 5 straight months.

So what’s the problem there? Well, this means the pressure on the US Fed to hike interest rates will increase and if the CPI surge persists, it might happen much sooner than later – maybe much before expected June’22. And is also means that the Fed’s plan to slowly ease into the tapering and hike rates once tapering is done with might not work out.

It doesn’t mean that the Fed will hike rates overnight – it will need to watch and see if this over 6% CPI will sustain over the next few months. Only if this happens, will the rate hike happen sooner than later.

The Indian markets are naturally worried as more than tapering, it’s a rate hike which will see some exodus of FII money from the markets. There is also fear that if Fed hikes rate, the RBI too will follow suit. The Fed still believes that the spike in inflation is caused by supply-side issues and, therefore, is transient, similar to what the RBI here also feels.

What is ironic is that the Indian market is worried about the US CPI but what about in India itself? CPI for Oct will come in tomorrow and it is expected to be high. And we are not too perturbed yet as it is widely expected that its not yet a panic situation where the RBI needs to step in and start hiking rates – logically, it needs to but it can afford to wait-and-watch till early 2022. Tax on fuel has been reduced and we could the impact of that percolating a bit down to the manufacturing expenses.  But for two months or more, our CPI will also remain elevated.  

The markets are currently down over 660 points and we feel, if you have a long-term perspective and have conviction, it’s a good time to buy into good stocks – JITF Infra, Jain Irrigation, Orient Paper, Orient Cement, Patel Eng, Century Textiles, Hind Copper, SCI.