'Stop Copying US Economy': Three-Decade High US Inflation Triggers Fear Among Investors

The October consumer inflation data jumped to 6.2%. This is the fastest rate in the US since 1990. Economists have predicted a substantial spillover of inflation from the US to developing economies, including India, as these countries may contain exchange rate volatility.

Indian equity markets on Thursday traded under immense pressure after the US economy registered three-decade high inflation following an increase in energy and food prices, triggering concerns among investors about their money in developing countries.

India's Bombay Stock Exchange Sensex fell below the 60,000-mark, dropping by one percent, while MSCI's broadest index of Asia-Pacific shares outside Japan slid 0.57% on Thursday.

Brent crude and American crude prices slumped by more than two percent due to a surge in the value of the US dollar against other currencies.

Experts fear that inflation will most probably spill over from the US to India due to a dislike on the part of the Reserve Bank of India (RBI) of large nominal exchange rate movements.

"The recent experience of price rise is across all the economies. Therefore, the spillover impact will be more on developing economies trying to contain exchange rate volatility", Sudhanshu Kumar, an economist at the Centre for Economic Policy and Public Finance (CEPPF), Patna city, told Sputnik.

Kumar said that theories and empirical evidences suggest that if the objective of the central bank (the Reserve Bank of India) is to curb exchange rate volatility, then an increase (or decrease) in the US inflation forces domestic monetary authorities to allow domestic inflation to rise (or fall) to avoid a domestic currency depreciation (or appreciation).

US inflation at three decade high. pic.twitter.com/5yTRlgFKaI

— Ira Dugal (@dugalira) November 10, 2021

The American dollar also found immense support from the possibility of an increase in interest rate by the US Federal Reserve quicker than peers in Europe and Japan to curb the rising inflation.

The dollar rose to a 20-month high against the euro, while the Japanese yen fell back towards multi-year lows.

Last week, the US Federal Reserve announced that it would begin tapering -- the process of slowly pulling back the stimulus they've provided during the pandemic -- before the end of this year.

Global Financial System Biased in Favour of US?

Jay Kotak, the associate vice president of India's Kotak Mahindra Bank, has pointed towards the US economy's undue advantage in the present global financial system.

Comparing the macro-economic data of the US and India, Kotak underlined that the average inflation for the last six months in both the countries is ~5.5%.

He said that India has also had a stable currency for years, lower debt to Gross Domestic Product than the US, and $640 billion in foreign exchange reserves. But still, the American government borrows at 1.5% for 10-year bonds, while India borrows at 6.3%.

"An almost 5% borrowing premium seems high… Other than the fact that the USD has perceived global value, and only the US can create dollars! Something isn't right", Kotak said.

He also added that all the companies that provide AAA ratings to the US economy also happen to be American.

Stop Copying America: Canadian Parliamentarian

Pierre Marcel Poilievre, a Canadian parliamentarian, has warned the Justin Trudeau government and advised it to stop copying American-style money printing to avoid inflationary pressure in the economy.

If you still doubt that money printing is to blame for inflation, look at this chart. pic.twitter.com/RSUxHWH5Af

— pierrepoilievre (@PierrePoilievre) November 10, 2021

"Federal Reserve money printing and large government deficits send US inflation to 30-year highs. Time for Canada to stop copying failed American-style money printing and restore sound money", Poilievre said on Thursday.