India: Inflation – 5.5%, Target inflation – 4%, Interest rates at 6.5%
US: Inflation – 3.1%, Target inflation – 2%, Interest rates at 5.25-5.5%?
India’s Headline Inflation in November 2023 rises to 5.5% owing to higher food prices, thus still chasing RBI’s target inflation of 4%. Four days back, while RBI retained the repo rate at 6.5%, reaching inflation target remains at the core of the interest rate policy.
(PS: Headline Inflation encompasses all commodities including Food and Energy. Food and Energy are generally more volatile than other commodities. Core Inflation is Headline Inflation minus Energy and Food.)
US Inflation edges down to 3.1% in November 2023 as against Fed’s target of 2%. Labour markets have cooled down and with recent softening of energy prices, inflation has moderated (Chart 1).
Tomorrow, at the last FOMC meet of the year, Jay Powell will deliver the interest rate decision. Labour markets have been driving the rate hikes for last many months and has kept the central bank’s policy on edge due to the effects of higher interest rates. Over recent months, labour markets are showing signs of cooling down as wage growth edges down gradually (wage growth is the measure used by central banks to check labour market situation).
Crude oil prices have slipped down in the month of November and still show signs of weakness in month of December due to weaker economic outlook, higher US inventories, China slowdown. Despite OPEC+ measures on production cuts, oil prices remain weaker.
Inflation remains over Fed’s target of 2%, caution by Fed on the interest rate policy. A hike for tomorrow is not in sight, Fed is expected to retain the interest rates at 5.25-5.50%.In tomorrow’s delivery, markets will be looking for indications for possible interest rate cuts in year 2024. A lot of positive momentum has been building up, as evidently observed in recent rally of equity markets touching ATHs and 52W highs in India and US, for any positive indication may drive the current momentum over the short (near) run.
Crude markets have however, reacted negatively to the inflation numbers by falling 3% due to higher than target inflation data as they fear Fed will keep rates at higher levels for long or even fearing another hike, thus fuelling the fears of economic slowdown. It is noteworthy that US Crude WTI and Brent are nearing long term support levels (Chart 2)
-Ushma Zunzavadiya
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