US inflation at 8.2%; too high despite hawkishness

How do we interpret the above inflation break up table and what does it mean for future Fed action?

a)    While overall inflation has fallen in the last 3 months by 90 bps from 9.1% in June 2022 to 8.2% in September 2022, food inflation and core inflation remain a problem.

b)    Crude price has fallen sharply on recession concerns and that is showing in gasoline prices coming down. However, now the OPEC has just cut supply by 2 million barrels per day (bpd) and that could boost crude prices.

c)    The real problem in energy basket is elsewhere. Even if there is some stability in crude prices, the prices of gas and electricity are still on an uptrend. It is happening already and if there is any worsening of Ukraine situation, things could just get worse.

d)    Food inflation (especially the food at home segment) is at record levels in the US. Cereals, dairy products and vegetables are feeling the pinch. Food inflation at 11% is a multi-decade high.

e)    The other big worry is core inflation, which has been triggered by the prices of services. For example, from medical services to help services to vehicle services and air fares have all gone up sharply, contributing to a spike in core inflation. 
 

How will the Fed react to this data and what about India?

Make no mistake, Fed stays hawkish and will continue to stay hawkish. Be prepared for around 75 bps in November and 50 bps in December before there could some pause in the rate hike. Sitting here in India we must not miss the bigger picture. Fed has the exorbitant privilege of managing the US dollar, which is central to global trade and commerce. The currency will always be in demand in the absence of alternatives. Fed can afford to stay hawkish for longer, because indirectly it still benefits the dollar value.

Does that argument apply to India too? RBI is in a kind of policy quandary at this point of time. It needs to align with Fed on monetary policy as it would risk divergence otherwise. That tends to impact global portfolio flows. On the other hand, if it gets too hawkish, the outcomes could be equally bad. In India, IIP has dipped into negative, rupee has gone for a toss down to 82.40/$ and inflation is still not under control. It is time for the RBI to make a choice, perhaps between the devil and the deep sea, but the choice has to be made now.