THE US HAS AN INFLATION PROBLEM

A jump in US inflation may pressure the Fed to tighten monetary policy sooner than expected. How would India fare in that scenario?

- Shri V.P.Nandakumar

There is no doubt that the US economy is facing an inflation problem. And the risk is that if it is not handled with care, it can get out of hand.

According to the US Labour Department, Consumer Price Index (CPI) in June 2021 increased by 5.4% from a year ago, the highest 12-month rate since August 2008. Earlier, the consumer price inflation for the month of May showed a 5% increase over the year, which was also the highest 12-month rate since August 2008. But the run-up in inflation had begun in April this year when consumer prices registered a 4.2% increase over the year. For the record, the US Federal Reserve (Fed) has long targeted an inflation rate of 2%, so these numbers are clearly well above their comfort zone.

Indeed, the US Fed has acknowledged that inflation is stronger and perhaps more durable than they had anticipated. When the Federal Open Market Committee (FOMC) met in June, they revised their estimated consumer inflation for the whole year to 3.4%, which is 1 percentage point higher than their March projection, and double of what they had forecasted in June 2020. However, they insist there is no need to press the panic button as higher prices are transitory and related to the peculiarities of an economy getting back on its feet after the unprecedented lockdowns.