Looking at developments in the United States, there is reason for some hope. On Tuesday, the U.S. inflation rate for May was released: 4 percent annualized, the lowest rate in more than two years and almost one percentage point lower than in April (4.9 percent).
Inflation trends in the United States have been ahead of those in the euro zone in recent years. U.S. inflation – driven in part by President Biden’s investment plans – has been above the central banks’ 2 percent annualized target since March 2021. The peak in US money depreciation was at 9 percent in July 2022. Since then, US inflation has declined.
High inflation in the euro area started later and also peaked later: from the summer of 2021 inflation in the euro area has been above 2 percent, peaking in October 2022 at 10.6 percent, in May this year inflation was 6.1 percent.
U.S. inflation is now moving back toward more bearable levels, more clearly than European inflation. This Wednesday, the Federal Reserve, the U.S. central bank, holds an interest rate meeting. Analysts say the latest inflation figure increases the likelihood that the Fed will not raise interest rates this time – for the first time since the cycle of rate hikes began in March 2022.
Raising interest rates is the classic means for central banks to fight inflation. It makes borrowing money more unattractive. As a result, less money flows into the economy, which should stop price increases.
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The Fed target of 2 percent is getting a little closer, but has not yet been reached. It is possible that the Fed will still raise interest rates at the next interest rate meeting, in late July. In doing so, the Fed will look primarily at underlying inflationary pressures. You can read that from the so-called core inflation, from which volatile energy and food prices have been filtered out. That core inflation in the U.S. was still high in May for now: 5.3 percent annualized, as high as in the euro zone. But analysts are drawing hope from the further “peeling off” of that core inflation rate. If you take out the cost of housing from that again, core annual inflation is falling. Meanwhile, in the shorter term (on a monthly or three-month basis), housing price appreciation has already fallen significantly, tweets economist Jason Furman, affiliated with Harvard.
ECB board members will be looking, at the same level of detail, at (core) inflation figures for the eurozone when they meet Thursday for an interest rate meeting. Investors do expect the ECB, unlike the Fed, to raise interest rates. The ECB started rate hikes later than the Fed and still has a longer way to go. The ECB deposit rate for banks, currently the key rate, is at 3.25 percent.
About the author: Wesley C Waldo
Wesley C Waldo, a promising writer who is preparing to publish his first novel in 2023. Travels a lot and collects the clues for a new book. He writes on social topics, sometimes describes an event or two.
