Wednesday November 10, 2021
Pressure on the Fed is growing
US inflation at its highest level since 1990
The rate of inflation in the United States is moving further away from the Federal Reserve’s target and is rising to its highest level in 30 years. The current course of the monetary authorities is constantly wavering. Because according to critics, the increase is no longer solely due to special Corona factors.
The upward trend in prices in the USA accelerated further from a high level in October. The consumer prices increased compared to the same month last year by 6.2 percent, such as the Department of Labor in Washington announced. This is the highest inflation rate since 1990. Analysts had only expected an acceleration to 5.9 percent on average. In the previous month, the rate was 5.4 percent.
According to the ministry, the price increase was broad and affected numerous categories. Energy, rents, groceries, used cars and new cars were significantly more expensive. The inflation rate excluding energy and food, the so-called core rate, rose from 4.0 to 4.6 percent. This rate is mostly viewed by economists as a reliable measure to determine the underlying price trend.
Inflation is thus moving even further away from the medium-term target value of the US Federal Reserve, which is two percent. However, the Fed regards the increased inflation as a transitional development determined by special corona factors, which should soon weaken again. Critics complain that the longer the inflation rate remains high and the greater the deviation from the Fed’s target, the more this view is shaken.
“Time for expansionary monetary policy has expired”
In the opinion of Thomas Gitzel, chief economist at Liechtenstein’s VP Bank, the US central bank should feel confirmed in its decision to cut back its bond purchases by the unexpectedly strong rise in inflation. “The US monetary authorities will already reduce their monthly bond purchases in the current month. That is a good thing, because the time for expansionary monetary policy measures has expired,” wrote Gitzel in a comment.
However, it is exciting to see that the bond markets are becoming increasingly skeptical about the economy. “The yields on long-term US government bonds have recently declined noticeably. The material shortages are not only driving up prices, but also increasing economic risks,” said Gitzel. If the material shortages persist in the coming year, the Fed will also have to take a closer look at economic risks.
LBBW economist Dirk Chlench expects that the US central bank will initiate the key interest rate turnaround by the end of 2022 at the latest. “The US Department of Labor writes that prices rose across the board in October. In view of these figures, it is becoming increasingly difficult for the US Federal Reserve to attribute the acceleration in inflation solely to special and catch-up effects,” commented the Chlench on the figures.
“Probably temporary” price effects?
In view of the US inflation of 6.2 percent in October, NordLB economist Bernd Krampen doubts that the Fed will be right with its latest statement of “likely temporary” price effects. “The normally expected braking effect of inflation on the economy could be weakened this time by the high volume of savings, wage increases and the sustained expansionary fiscal policy, or take effect only after a delay,” says Krampen.
Inflation will remain in an uncomfortable range of over 5.5 percent into the first quarter of 2022, and hardly fall below 4 percent in the second quarter. “In the best case scenario, the situation could not be more relaxed until the second half of 2022”, the economist calculates. Apart from tapering, the US central bankers could hardly take any further measures at the moment. “And exactly when inflation is likely to decline, the question of rate hikes arises: bad timing!”
In the course of the recovery from the economic effects of the corona pandemic, prices have risen sharply in numerous countries. One of the reasons for this are problems with international supply chains. In Germany, the inflation rate climbed to 4.5 percent year-on-year in October. That was the highest value since 1993, as the Federal Statistical Office in Wiesbaden explained. In the US, high inflation is becoming more and more of a problem for President Joe Biden. The opposition Republicans accuse the president of not doing anything to counter the rise in prices.