US inflation rises 8.5%, Hits 4-Decade High In March

Inflation soared over the past year at its fastest pace in more than 40 years, with costs for food, gasoline, housing and other necessities squeezing American consumers and wiping out the pay raises that many people have received.

The Labour Department said Tuesday that its consumer price index jumped 8.5 per cent in March from 12 months earlier — the biggest year-over-year increase since December 1981. 

Prices have been driven up by bottlenecked supply chains, robust consumer demand and disruptions to global food and energy markets worsened by Russia's war against Ukraine.

The government's report also showed that inflation rose 1.2 per cent from February to March, up from a 0.8 per cent increase from January to February.

The March inflation numbers were the first to capture the full surge in gasoline prices that followed Russia's invasion of Ukraine on February 24. 

The escalation of energy prices has led to higher transportation costs for the shipment of goods and components across the economy, which, in turn, has contributed to higher prices for consumers.

The latest evidence of accelerating prices will solidify expectations that the Federal Reserve will raise interest rates aggressively in the coming months to try to slow borrowing and spending and tame inflation. The financial markets now foresee much steeper rate hikes this year than Fed officials had signalled as recently as last month.

How it will impact India

The soaring inflation may pressure the US Fed to consider further rate hikes after it approved its first interest rate increase in more than three years. 

After keeping its benchmark interest rate anchored near zero since the beginning of the Covid pandemic, the Federal Open Market Committee said it will raise rates by 25 basis points.

This is likely to push foreign portfolio equity outflow which has been $15 billion or 0.5% of market cap during the January-March 2022 period- the highest in terms of absolute size and third highest in terms of percentage of market cap in last 15 year, ET reported.

If the Fed increases interest rates, US investors are less likely to invest in India which will impact the country's foreign flows.

Most notably, FPIs pulled out Rs 44,820 crore from Financial Services and Software sector during the quarter. At least 30.32 percent of FPIs that invested in India in the December quarter were from the US, and this is the highest share compared to all other countries.

After massive net outflows to the tune of Rs 1.48 lakh crore from equities in the last six months from October 2021 to March 2022, foreign portfolio investors have turned net buyers in April so far by infusing Rs 7,707 crore in domestic equities

FPIs also put in Rs 1,403 crore in the debt markets during the period under review, after pulling out a net Rs 8,705 crore in the last two months (February and March), according to NSDL data. With this, total FPI investment is Rs 8,276 crore in April so far.
 

(With Agency Inputs)