The National Stock Exchange (NIFTY) opened in the red this morning amid a negative trend in other Asian stock market indices.

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One of the factors at play was the US witnessing the largest one-month change in the consumer price index for all urban consumers (CPI-U) from May (0.6 percent) to June 2021 (0.9 percent) on a seasonally adjusted basis since June 2008, when the index rose 1.0 percent. The US Bureau of Labor Statistics released this data on Tuesday.

The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services.

Over the last 12 months, the all-items index increased 5.4 percent before seasonal adjustment. This was the largest 12-month increase since a 5.4 percent increase for the period ending August 2008.

What happened in the US stock market?

When inflation rises, consumer spends go down and this affects sentiment, which is reflected in stock market fall.

The US markets were jittery in the morning trading session of July 13 as investors were trying to understand elements such as the economic recovery path and the policy strategy of the US Federal Reserve. When inflation is high, banking regulators tend to raise interest rates.

Federal Reserve Chair Jerome Powell will be closely watched when he addresses Congress on July 14-15 as he could indicate how President Joe Biden’s government intends to tackle rising inflation.

What does rising inflation mean for the stock market?

Foreign portfolio investors (FPIs) based in the US generally borrow in a country where the interest rates are low and invest in a country (like India) where the rates are high. And their profit spread depends on dollar-rupee currency fluctuations.

If the Federal Reserve increases interest rates, then the spreads of American investors will fall; and they could invest less in India.

The other negative impact of rising US inflation is that the input costs for Indian companies could go up thereby adversely impacting their profitability. If they increase the prices of goods, then consumers will purchase less.

Gold prices in Asia on the morning of July 14 were subdued as the dollar firmed up due to a rise in inflation.

Tackling rising inflation

One of the ways to tackle inflation is to provide a stimulus for the economy’s growth. The Biden administration announced the $3.5 trillion infrastructure investment plan and the $1.9 trillion in pandemic relief to boost the US economy and generate employment.

US Treasury Secretary Janet Yellen said that US inflation risks are not quite significant and there are tools to tackle them.

Yellen and other officials believe that the aid, which comes on top of pandemic relief passed by Congress last year, is desperately required for an economy hit hard by Covid-19, particularly for low-wage workers in service industries.