Inflation Causes and Trends

A perfect storm for households & Corporates as Judicial, Geopolitical & Electoral Cycles Collide? : The Supreme Court’s Aug 2025 order on cost-reflective tariffs addresses a core distortion: regulatory assets of ₹3L-cr. But implementation timing creates a policy trilemma from the Convergence or collision of 3 cycles: 1. Judicial: Liquidating deferred costs is non-negotiable post SC order- Power tariffs may rise in certain states as they clear Rs3L-cr of deferred costs post SC order. No more kicking the can. This clean-up ends a decade of hidden costs. But now It will have to be priced in by households and companies. 2. Geopolitical: Iran conflict transmits crude volatility to domestic fuel - Iran war pushes crude & crude product prices up. LPG + fuel price revisions expected now as elections end today 3. Electoral: Fuel price suppression may end after the state poll results today. There will be a policy bind. Fiscal space is limited due to discom debt of ₹7.5L-cr. RBI can’t cut rates if supply-side inflation spikes. Why it matters for households & companies: For Households: electricity, fuel and other household items may get pricier as the cascading effect takes place and may impinge upon consumption and savings even without a harsh El Nino impact For companies: - Input costs: Electricity is 3-8% of manufacturing opex. Tariff rise hits directly. - Logistics: Diesel revisions post elections could lift freight 2-4%. - Demand: Household budgets face a 3-front squeeze, impacting discretionary spend. H1 of FY27 may warrant re-pricing of contracts, hedging of energy exposure & stress-test for stagflation-lite. Fiscal-Monetary Trade-off: States lack fiscal space to absorb shocks given Rs7.5L-cr discom debt. The #RBI faces supply-side inflation that rate tools can’t fix without hurting growth. Blanket subsidies risk fiscal slippage; inaction risks household distress. Path Forward: - Staggered, predictable tariff hikes vs cliff-effect - Direct benefit transfers for BPL consumers only - Accelerate UDAY 2.0-style discom reforms to cut ACS-ARR gap #Inflation #Energy #EnergyReforms #FiscalFederalism #MonetaryPolicy #PolicyMatters #PublicPolicy

UK food inflation rising 4x faster for five key foods (butter, milk, beef, cocoa, coffee) that are particularly impacted by extreme weather. These foods make up 11% of the typical shopping basket used by the Office for National Statistics (ONS) to calculate the headline national inflation rate but are driving 40% of the total (5.1%) inflationary impact on the basket's price. This in turn makes food prices the 2nd biggest driver of the UK's stubbornly high inflation rate. England has had its second worst harvest on record after record heat and drought this summer. With 3 of the worst harvests happening in the last 10 years. What's driving inflation for these five foods: ❌ Coffee prices are particularly exposed to climate risk with 97% of all coffee grown in countries vulnerable to climate impacts, Coffee prices in commodity markets rose sharply at the end of 2023 and continued to climb through 2024, reaching a peak in March 2025. The rise was driven largely by poor harvests in Brazil and Vietnam. Brazil is the dominant producer of arabica beans and Vietnam the leading supplier of robusta, the variety used in most instant coffee. ❌ Cocoa prices are highly exposed to climate risk, with almost all cocoa globally (99.9%) grown in low climate readiness countries. Commodity prices have more than tripled in the past three years and doubled in the past two years. Some of this increase is still to feed through to consumer prices, which have risen 27% in the past two years and 45% over three years. ❌ Beef and veal prices in the UK have risen sharply since 2020, driven by a combination of climate-related pressures, high input costs, and structural supply constraints. Successive years of weather extremes, including summer droughts, unseasonal rainfall, and flooding, have reduced pasture productivity and disrupted grazing patterns across much of the UK. These extremes have forced farmers to buy in more feed, cut herd sizes, and consider investments in supplementary water and shelter infrastructure. ❌ A similar set of climate extremes has increased the cost of production for dairy farmers. A record-wet Oct 2023–Mar 2024 period that left fields waterlogged and damaged, was then followed by a long hot summer. This resulted in lower grass growth, which alongside other factors tightened the availability of milk and cream pushing up the prices of milk and butter significantly at the end of last year. Prices had been expected to come down from spring this year, but the driest spring and hottest summer on record reduced grass growth. This is here and now. Recently olive oil and produce have seen similar inflationary pressures from extreme weather. Food costs are a massive driver for household cost of living across the world, which in turn is a massive driver for societal wellbeing and stability. The food system drives GHG emissions, its massively vulnerable to them too. For link to ECIU report see link in comments George Smeeton

Stagflation I want to highlight one of the most powerful signals in the global economy right now, and it is hiding in plain sight. This chart shows the relationship between the Baltic Dirty Tanker Index, a proxy for global shipping costs, and global manufacturing PMI. Under normal conditions, this relationship is straightforward. Manufacturing activity leads by about one year, and shipping follows with a lag. When global demand is strong, PMI rises, trade expands, and freight rates increase. The system moves together. What we are seeing today is different. Shipping costs are rising but PMI are not yet rising (data to be released next week). This divergence matters. It tells you that freight rates are no longer being driven by demand. They are being driven by constraints. Routes are longer, insurance costs are higher, efficiency is lower, and energy costs are rising. The system is under stress. Research shows that shipping costs feed into inflation with a lag and can have persistent effects on the price level. What this means in practice is that higher freight costs today will translate into higher prices across goods tomorrow. At the same time, the weakening PMI tells you that production is slowing. So you have rising costs and weakening activity at the same time. This is not a demand-driven cycle. This is a supply shock. In a productivity-driven expansion, you would expect the opposite. Strong manufacturing, rising trade, and shipping costs increasing alongside activity. What we have today is a break in that relationship. And that break is the signal. The oil market is already tight. Energy costs are rising. Supply chains are becoming more expensive to operate. Now the data is confirming that global trade is being affected as well. When shipping costs rise while manufacturing slows, the system is no longer expanding. It is adjusting. That is how stagflation begins. Regards, Andre Chelhot, CFA Editor, The Macro Anchor #Macro #Shipping #PMI #Oil #Inflation #Stagflation #GlobalEconomy

Kevin Warsh is about to inherit a Fed whose biggest problem will not be the size of the balance sheet, the pace of runoff, or the dot plot. It will be the supply shocks the FOMC has to absorb that monetary policy was never designed to fix. We are seeing one right now. Brent crude over $105. The Strait of Hormuz effectively closed. A war and a naval blockade have made oil a geopolitical instrument again, in a way OPEC has not managed in twenty years. The IMF has cut its global growth forecast and raised its inflation projection. Some of this will hit U.S. inflation prints over the next few quarters, and the Fed will be asked what it plans to do about it. The answer is: not much that addresses the actual problem. Monetary policy can lean against second-round effects and keep expectations anchored. It cannot reopen a strait or replace eight million barrels a day. Behind oil sit critical minerals, semiconductors, pharmaceutical precursors, and transformers. Each one is a supply shock waiting to land at the Fed as inflation. I was on the FOMC for a decade. The 2021 to 2024 episode taught me that when the supply side breaks, monetary policy gets handed a problem it was not designed to solve and is judged on the result anyway. The Fed itself contributed to that episode by staying accommodative too long. That is part of the honest record. But the lesson going forward is that monetary policy alone cannot manage an inflation shock whose roots are not monetary. We are not losing the research race. We are losing the part of the industrial economy between the lab and the IPO. The factories. The workforce. The capacity to build at scale. That is the part the Fed cannot rebuild with a rate cut, a balance sheet decision, or a framework review. The conversation about the next chair has been about the Fed's tools. The conversation we should be having is about the supply curve those tools will have to navigate, and who is responsible for building it. I've laid out the full argument in the article below.

Some papers arrive as theory; others arrive as diagnosis. The latest International Monetary Fund Working Paper, "𝘛𝘩𝘦 𝘊𝘦𝘯𝘵𝘳𝘢𝘭 𝘉𝘢𝘯𝘬’𝘴 𝘋𝘪𝘭𝘦𝘮𝘮𝘢: 𝘓𝘰𝘰𝘬 𝘛𝘩𝘳𝘰𝘶𝘨𝘩 𝘚𝘶𝘱𝘱𝘭𝘺 𝘚𝘩𝘰𝘤𝘬𝘴 𝘰𝘳 𝘊𝘰𝘯𝘵𝘳𝘰𝘭 𝘐𝘯𝘧𝘭𝘢𝘵𝘪𝘰𝘯 𝘌𝘹𝘱𝘦𝘤𝘵𝘢𝘵𝘪𝘰𝘯𝘴?", is both. Its importance lies in the problem it refuses to simplify: supply shocks are no longer side events in the inflation story; they are central to it.  Oil, food, logistics, geopolitics, and exchange-rate pass-through keep reminding small open economies that inflation is not always made at home. 𝗧𝗵𝗲 𝗽𝗮𝗽𝗲𝗿 𝗮𝘀𝗸𝘀 𝗮 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻 𝘁𝗵𝗮𝘁 𝗺𝗮𝘁𝘁𝗲𝗿𝘀 𝗳𝗼𝗿 𝗰𝗲𝗻𝘁𝗿𝗮𝗹-𝗯𝗮𝗻𝗸𝗶𝗻𝗴:  when should policymakers look through supply shocks, and when must they tighten to prevent expectations from drifting? At its core, the paper argues that monetary policy must be state-contingent. Central banks can look through supply shocks while expectations remain anchored, but they must pivot decisively when the anchor begins to move. 𝘈𝘮𝘰𝘯𝘨 𝘵𝘩𝘦 𝘵𝘩𝘦 𝘬𝘦𝘺 𝘪𝘯𝘴𝘪𝘨𝘩𝘵𝘴 𝘧𝘳𝘰𝘮 𝘵𝘩𝘦 𝘱𝘢𝘱𝘦𝘳 𝘢𝘳𝘦: 1. 𝘚𝘶𝘱𝘱𝘭𝘺 𝘴𝘩𝘰𝘤𝘬𝘴 𝘤𝘳𝘦𝘢𝘵𝘦 𝘢 𝘳𝘦𝘢𝘭 𝘮𝘰𝘯𝘦𝘵𝘢𝘳𝘺-𝘱𝘰𝘭𝘪𝘤𝘺 𝘥𝘪𝘭𝘦𝘮𝘮𝘢. Looking through shocks can protect output and employment, but doing so too long can de-anchor inflation expectations. 2. 𝘌𝘹𝘱𝘦𝘤𝘵𝘢𝘵𝘪𝘰𝘯𝘴 𝘢𝘳𝘦 𝘵𝘩𝘦 𝘢𝘯𝘢𝘭𝘺𝘵𝘪𝘤𝘢𝘭 𝘤𝘦𝘯𝘵𝘳𝘦 𝘰𝘧 𝘨𝘳𝘢𝘷𝘪𝘵𝘺. The interesting case is bounded rationality: agents partly understand policy, but do not fully internalize its implications. 3. 𝘖𝘱𝘵𝘪𝘮𝘢𝘭 𝘱𝘰𝘭𝘪𝘤𝘺 𝘱𝘪𝘷𝘰𝘵𝘴. The central bank may look through shocks initially, but once they cumulate beyond a threshold, the optimal response becomes a sharp hawkish shift. 4. 𝘈 𝘱𝘪𝘷𝘰𝘵 𝘤𝘢𝘯 𝘭𝘰𝘸𝘦𝘳 𝘪𝘯𝘧𝘭𝘢𝘵𝘪𝘰𝘯 𝘸𝘪𝘵𝘩𝘰𝘶𝘵 𝘧𝘰𝘳𝘤𝘪𝘯𝘨 𝘢 𝘳𝘦𝘤𝘦𝘴𝘴𝘪𝘰𝘯. If tightening re-anchors expectations, inflation can fall through the expectations channel rather than mainly through engineered slack. 5. 𝘋𝘦𝘭𝘢𝘺 𝘪𝘴 𝘤𝘰𝘴𝘵𝘭𝘺 𝘸𝘩𝘦𝘯 𝘦𝘹𝘱𝘦𝘤𝘵𝘢𝘵𝘪𝘰𝘯𝘴 𝘣𝘦𝘨𝘪𝘯 𝘵𝘰 𝘮𝘰𝘷𝘦. Once expectations absorb repeated shocks, tightening too late or too slowly becomes expensive. For emerging and frontier economies, the message is especially relevant. Food and fuel shocks move transport costs, wage demands, fiscal politics, and household welfare. A central bank may know inflation is imported, but households live in prices, not decompositions. That is why this paper is worth reading. It does not say: always look through. It does not say: always tighten. It says something more useful: look through while the anchor holds; pivot when the anchor starts to move.

The Coming Inflation Central Banks Can’t Fix Sumitomo Chemical declared force majeure yesterday, becoming the fifth Asian chemical producer in a single week to do so. The sequence began with Chandra Asri in Indonesia, followed by Yeochun NCC in South Korea. By March 5, the Petrochemical Corporation of Singapore had declared force majeure on 1.1 million tons of ethylene capacity on Jurong Island, and a day later Aster reported its steam cracker operating at only half capacity. The root cause across all five cases is the same: naphtha supply disruption. Naphtha is the key feedstock that steam crackers break down to produce the base chemicals behind plastics, synthetic rubber, packaging materials, and countless industrial inputs. Most Asian crackers rely heavily on Middle Eastern naphtha shipments, and nearly all of those cargoes pass through the Strait of Hormuz. When the Strait effectively closed, feedstock flows were interrupted almost immediately. Five force majeure declarations in seven days signals a significant disruption to the chemical backbone of global manufacturing. Ethylene and its derivatives sit at the base of an enormous industrial pyramid. When ethylene supply tightens, prices ripple through polyethylene, polypropylene, packaging materials, and industrial plastics. Polymer prices are already rising into double-digit territory, and the cost pressure will inevitably move downstream into consumer goods, logistics, and manufacturing. The implications extend beyond industrial supply chains and connect directly with the earlier discussion around fertilizers and food inflation. Fertilizer production relies heavily on both natural gas and petrochemical inputs, while sulfuric acid — largely derived from oil and gas refining — is essential for producing phosphate fertilizers. When energy logistics through Hormuz are disrupted, the shock does not stop at crude prices. It also constrains the chemical inputs required to sustain modern agriculture. This creates a potential cascade. First, oil and LNG prices rise due to the chokepoint disruption. Second, petrochemical and fertilizer feedstocks become scarce or more expensive. Third, farmers reduce fertilizer usage or face higher input costs, which tends to lower crop yields in subsequent planting cycles. Finally, agricultural commodities such as wheat, corn, soybeans, palm oil, coffee, and sugar begin to rise as global food supply tightens. The result is a form of cost-push inflation that tends to be far more persistent than demand-driven inflation. When inflation originates from disruptions in energy, chemicals, and food supply chains, it becomes structurally embedded in production costs across the economy. This kind of inflation is inherently sticky because it reflects physical shortages and supply bottlenecks rather than excessive consumer demand.

Today's inflation report wasn't a surprise, but it shows the impact of a supply shock on the economy. The headline Consumer Price Index increased 3.3% over the past year, which is up significantly from the 2.4% increase in February. On a monthly basis, prices increased 0.9% in March, compared to 0.3% the previous month. This is the largest monthly increase since 2022. However, core inflation, which excludes food and energy, only went up slightly in March. It increased 2.6% over the last year and 0.2% in the last month. The large increase in inflation was overwhelmingly because of the War in Iran and its impact on oil and gas prices. Energy inflation jumped 12.5% over the last year, while gasoline increased 18.9%. And on a monthly basis, gas prices increased nearly 25%. While the energy price inflation was dramatic, other areas of the report showed relative stability. Food, core goods, used cars, and shelter all saw low growth to slight contractions in prices in the last month. The question now is how long the oil price shock will persist. If the Strait of Hormuz fully reopens soon and oil starts to flow freely again, we could see oil and gas prices drop quickly. But if it takes longer to return to normal we risk the price increases becoming more entrenched and causing knock-on effects to goods prices. #economy #inflation #CPI #oil #gas

Food & beverage companies are facing a triple-crisis right now, and this impacts everyone: 1. The energy price shock is raising production & logistics costs along supply chains 2. Fertiliser commodities are having a supply shock of their own 3. Climate risk amplifies everything The war in Iran closing the Strait of Hormuz has spiked energy prices and many commodity prices, so if you’re a food or FMCG company, you’re seeing cost increases, left, right and centre. It’s a perfect storm. Let’s use a concrete example… Take a global food company: ~$90bn+ revenue, mainly linked to crops like corn, potatoes, oats and wheat. They disclose that commodity price volatility is a key business risk, so they hedge key agricultural inputs and actively manage procurement. But over the past few weeks: 📈 European gas prices up ~60%+, in some cases more than doubling since late February 📈 Urea prices up ~40%, moving from <$500/t to >$700/t ⚠️The Strait of Hormuz is a key export route for Gulf-based nitrogen fertilisers Chemical fertiliser is incredibly energy-intensive, and fossil gas is a primary input. And here’s the kicker…  Fertiliser represents ~30–45% of farm operating costs for major crops (according to USDA). So when gas prices rise 60–100% AND fertiliser prices rise ~40% at the same time, this creates a major structural increase in the cost of food production. For this example company, using conservative estimates: 👉 ~$25bn food cost base 👉 20–30% exposed to nitrogen-intensive crops ⚠️= $600m – $1.3bn potential cost pressure Companies hedge corn and wheat for protection against price volatility, but they do not hedge a 40% increase in the cost of GROWING them. This shock builds upstream and gets passed down to every company along the agri, food & bev supply chain, resulting in food price inflation. Like energy, food prices have an inflationary effect on the whole economy. And it also leads to social & political instability. People go crazy when the price of basic food becomes unaffordable! Leading to even more global volatility… And don’t forget, climate risk amplifies all of these structural issues… Food companies are already disclosing that climate change is impacting crop yields, water availability and input costs. * Lower yields → higher dependence on fertiliser * More extreme weather → greater volatility * More frequent disruption → less stable supply So what we’re seeing today is a preview of a world where energy shocks, fertiliser shocks and climate shocks combine. In this context, investing in supply chain resilience is existential. Will you be prepared for the next shock? Sources: * Company disclosures: 2025 annual filings (global food & consumer companies) * Commodity data: Reuters, March 2026 (urea, gas, Hormuz flows) * Farm cost data: USDA ERS (fertiliser share of crop costs)

US one-year breakeven inflation rate moves to 5.32% as global investors price in a move in inflation to that level. Can't say this enough: as the supply constraint caused by the war evolves from disruption to destruction of oil production and refining capacity one should anticipate inflation and the possibility of rising interest rates in its wake. One can already observe moves higher along the rate maturity spectrum today and the rising probability of a rate hike this year by investors. They are on point examples of the market pricing in rising risk of inflation. It is critical that the public, small and medium size businesses and policymakers that are not familiar with financial markets and economics see this evidence so they can make sound judgements about basic decisions around the household, portfolio, hiring and investment decisions and policy to navigate what is going to be a very mean year.

Energy Scarcity Is the Defining Risk of Our Time, And LNG Sits at the Center of It We are not in an energy transition. We are in an energy expansion crisis. Global demand is accelerating, driven by AI, industrial reshoring, population growth, and the rising expectations of emerging economies. Yet the one thing required to sustain all of it, reliable, dispatchable energy, is structurally undersupplied. This is where LNG becomes critical. Liquefied natural gas is no longer a “bridge fuel.” It is the backbone of global energy security. It powers cities, enables manufacturing, supports fertilizer production, and ultimately underpins food security. And yet, we are underinvesting. At the same time, the global system that delivers energy is becoming more fragile. Critical chokepoints like the Strait of Hormuz, the Suez Canal, and the Panama Canal are under increasing strain, whether from geopolitical tension, conflict, or climate-driven disruption. Energy is no longer just about supply. It is about whether supply can reach demand at all. Meanwhile, the market continues to signal a future of abundance. Forward curves suggest lower prices. Data providers project stability. But step back and ask a simple question: What essential commodity is cheaper today than it was five years ago? The answer is none. We are facing a systemic mispricing of scarcity risk. The constraints are not just in the ground, they are across the entire value chain: • Liquefaction capacity • Shipping availability • Regasification infrastructure • Industrial supply chains Companies like Baker Hughes, Honeywell, ABB and GTT are not just service providers, they are gatekeepers of global energy expansion. At the policy level, the disconnect is growing. Governments signal decarbonization while consuming increasing volumes of LNG. The U.S. Department of Energy is attempting at speeding up permitting at the exact moment global demand is accelerating. The result? Scarcity. Structural volatility. Rising geopolitical leverage for those who control supply. This is not theoretical. If energy supply fails to keep pace: • Inflation becomes structural • Food systems are strained • Emerging markets face instability Energy is not a sector. It is the foundation of civilization. And LNG is the mechanism through which that foundation is now being tested. For investors, the implication is clear: This is not a cycle. This is a multi-decade structural opportunity—and risk—sitting in plain sight. The question is no longer whether the world will need more energy. The question is whether we will be able to build it in time. #DOE #DOI #FERC #LNG #EnergySecurity #Energy