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UK consumer prices rise at fastest pace in almost 30 years

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Inflation measured by the consumer price index accelerated to 5.4% in the 12 months through December, the Office for National Statistics said Wednesday.UK consumer prices rise at fastest pace in almost 30 years | Business  Standard News

Consumer prices in the United Kingdom have risen at the fastest pace in almost 30 years as higher costs for energy, transportation, food and furniture squeezed household incomes.

Inflation measured by the consumer price index accelerated to 5.4% in the 12 months through December, the Office for National Statistics said Wednesday. That is the highest rate since March 1992, when inflation stood at 7.1%, and above the 5.1% seen a month earlier.

Economists warned that inflation is likely to rise further in coming months as the full impact of a recent surge in energy prices hits consumers. Gas and electricity bills for millions of households are expected to rise by 50% or more in April when a semi-annual adjustment in the energy price cap takes effect.

The government is under pressure to mitigate the jump in energy prices, with inflation now rising faster than wages. Soaring energy prices, supply chain backups and other issues led the Bank of England to raise interest rates last month for the first time in more than three years, increasing costs for borrowers, despite concern about the economic fallout from a surge in COVID-19 infections driven by the omicron variant.

What is of particular concern is that the change from November has come mainly from an increase in the price of food, said Kitty Ussher, chief economist for the Institute of Directors. Not only does this provide additional evidence that inflation is becoming endemic rather than transitory, it also bodes ill for households facing multiple rises in the cost of living this spring.

Also Read Like:- What do rising bond yields to signal to the markets?

The Bank of England, which tries to keep inflation below 2%, in December raised its benchmark interest rate to 0.25% from a record low 0.1%.

Shafiq Shabir, head of electronic trading at the broker Intertrader, said interest rates may climb to 1% by the end of this year following the eye-watering inflation figures.

Wage growth is expected to sit at 4.5% for 2022, meaning many will see their real-term incomes fall behind the increasingly tight cost of living.

What do rising bond yields to signal to the markets?

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A combination of factors including firming up of crude oil prices, risks to inflation and swifter-than-expected interest rate increases signalled by the US Federal Reserve have contributed to the hardening of bond yields.

What Do Rising Bond Yields To Signal To The Markets?

 India’s benchmark 10-year government bond yields surged to a high of 6.66 percent before easing to 6.60 percent on Wednesday, January 19.

 What has led to this spike? Factors including rising crude oil prices, risks to inflation and earlier-than-foreseen interest rate hikes signalled by the US Federal Reserve had set the stage for hardening bond yields. Logically, rising bond yields have triggered speculation that the Reserve Bank of India (RBI) may finally exit from its accommodative stance and start tightening interest rates.

Bond yields move in the opposite direction to prices.

Interest rates are inching up 

“G-Sec yields have firmed up and deposit rates too are slowly climbing,” said D K Joshi, chief economist at the rating agency Crisil Ltd. Joshi added that a change in rate stance is imminent, “if the Omicron (a variant of COVID-19) turns out to be a transitory affair

Remember, RBI’s monetary policy committee (MPC) has adopted a prolonged accommodative stance in view of the slow recovery of the economy from the pandemic’s impact.  It has so far ignored near-term inflationary pressures in a bid to support growth.

Yet, rising bond yields indicate interest rates will have to eventually harden, said Harihar Krishnamurthy, a market expert.

“Rate hikes may follow the market. And market rates have actually edged up anyway following global cues and the inevitable fallout of Indian inflation,” said Krishnamurthy.

A rate reversal is also possible due to the fact that Gross Domestic Product (GDP) growth and tax collections “look very good” and the impact of Omicron seems to be mild.

“So a change in stance followed by a reverse repo rate hike and then a repo rate hike is likely,” said Krishnamurthy. The repo rate is the rate at which RBI infuses liquidity into the banking system. The reverse repo is the rate at which RBI drains liquidity.

 Inflation threat looming

Data shows inflation with an upward bias. A consistently high inflation rate can force the MPC to reverse the rate path. Already, there is a debate within the MPC on the future course of the inflation fight. One of the MPC members, Jayanth Varma, has long argued against the continuation of an accommodative stance, saying the efficacy of monetary policy in fighting the Omicron variant is limited.

India's headline retail inflation jumped to 5.59 percent in December, thanks to an unfavourable base effect. The MPC has the mandate to keep inflation within a broader target band of 2-6 percent.

The latest Consumer Price Index (CPI) inflation print in December was 68 basis points higher than the November level of 4.91 percent, data released on January 12 by the National Statistical Office showed. It is the highest inflation has been since July 2021, when it had also come in at 5.59 percent.

Despite the sharp increase in inflation in December, the average for the last quarter of 2021, at 5.0 percent, is marginally lower than expected. RBI had forecast CPI inflation would average 5.1 percent in October-December.

What next?

The next meeting of MPC will take place in February. The MPC may not yet hike the rates, but many expect a change in the policy stance, rating agency ICRA Ltd wrote in a note.

“Following the fresh uncertainty triggered by Omicron and the associated restrictions, the rating agency expects a status quo on the stance of the Monetary Policy as well as the reverse repo rate in the upcoming meeting of the MPC to be held in February 2022, in spite of the rise in the retail inflation in December 2021,” said the note.

To be sure, not everyone shares this view. According to Moragn Stanley Research, the MPC may increase the reverse repo in February to mark the start of policy normalization.

“We expect the February policy to mark the start of policy normalization with a reverse repo rate hike to normalise the policy rate corridor,” said the Morgan Stanley note.

Omicron concerns

The impact of Omicron will be key. In the last policy, the rate-setting panel had clearly spelt out its concerns on the spread of the variant.

“India is being lashed by global spillovers. The main conduit has been financial markets so far but the channels themselves are diversifying. The biggest risk of contagion is now from the new variant. Unless a clearer picture emerges on the near-term outlook, we must take guard and resume battle readiness again,” RBI Deputy Governor Micheal Patra said, according to the Minutes of the meeting.

RBI Governor Shaktikanta Das too voiced concerns on the Omicron factor. “There is growing uncertainty regarding the evolving global macroeconomic outlook,” Das said.

"The emergence of the Omicron variant may cast some shadow on the momentum of contact-intensive services that were just showing signs of recovery in recent months. The threat of Omicron is also imparting additional volatility to the financial markets," Das said.

With 2,82,970 new coronavirus infections being reported in a day, India’s total tally of COVID-19 cases rose to 3,79,01,241, which includes 8,961 cases of the Omicron variant, according to health ministry data updated on Wednesday. Active cases have increased to 18,31,000, the highest in 232 days.

Omicron poses limited downside to Indian economy, say economists: Poll

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Asia’s third-largest economy is in the midst of a resurgence in coronavirus cases driven by the new variant that has forced most states to impose localised restrictions.

Omicron Poses Limited Downside To Indian Economy, Say Economists: Poll

There is scant downside risk to the Indian economy in the last months of this financial year from the Omicron coronavirus variant, according to economists polled by Reuters who said New Delhi should focus on fiscal prudence in its February budget.

Asia’s third-largest economy is in the midst of a resurgence in coronavirus cases driven by the new variant that has forced most states to impose localised restrictions.

The January 11-18 poll of over 45 economists forecast 5.0% economic growth this quarter, a sharp downgrade from the 6.0% given in December, finishing the year at 9.2% compared with 9.5% in the previous month’s poll.

But nearly two-thirds of those responding to an additional question, 21 of 32, said there was limited downside to the outlook for the rest of this fiscal year which ends in March.

Nine said it was at risk of downgrades, and two said it was prone to upgrades. The median growth projection for the next fiscal year was upgraded to 8.0% from 7.5% a month ago.

The current phase of restrictions is not as harsh as it was during the previous waves. So, I think Omicron and the economic damage it inflicts is a Jan-March story and will only be limited to this fiscal year," said Madhavi Arora, lead economist at Emkay Global Financial Services.

Arora reckons the first quarter of the next financial year starting in April will get an extra boost once the third wave passes, assuming it does.

The latest poll also estimated economic growth at 14.7% for the same quarter.

Inflation was expected to peak at 5.8% this quarter and then fall, remaining under the Reserve Bank of India’s 6.0% upper threshold until at least the end of fiscal 2023-24, taking pressure off the Bank for future interest rate rises.

India’s finance minister Nirmala Sitharaman will present the country’s 2022/2023 federal budget on February 1, providing new targets for government spending, tax receipts, economic growth and fiscal deficits.

When asked what the government should focus on, 16 of 23 respondents said fiscal prudence rather than expansion, despite pandemic-related risks.

"India and other emerging markets will have to start thinking about consolidating their COVID-19 year budget deficits in a global monetary environment where the U.S. Fed is starting to normalise policy," said Miguel Chanco, senior Asia economist at Pantheon Macroeconomics.

"We are expecting quite aggressive tightening from the Fed this year and that is going to raise borrowing costs not just for India but for most EMs."

The country’s federal fiscal deficit surged to 135.1% in the April-November period of the last financial year but in the current year it narrowed to 46.2% for the same period, helped by a rise in tax collections.

The fiscal deficit target for next financial year was predicted to be 6.0%, and 5.5% for FY 2023/2024, both lower than this year’s 6.8%.

"They will be pretty conservative with spending and revenue projections," said Robert Carnell, head of Asia Pacific research at ING.

"It is really more of a revenue worry from Omicron, so I do not think you should be spending on the off-chance that Omicron is bad. Because that sort of bakes in the fact that the targets get missed at that point."

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