Inflation would become an ever greater threat to the economy – there are only bad and worse solutions on the table
Even higher inflation would not be bad if it was driven by aggregate demand. The slowdown of the economy can be achieved by an increase in interest rates, it will adjust the inflationary expectations, at the same time it will cool the demand for new money – because it will become more expensive in the economy – and inflation will continue to decrease. This is the scenario that is about to play out in the United States, and the Fed is taking adequate steps for it in the form of sharp rate hikes. but what about the old continent? Average inflation reaches 9.1%, the expected August number was at the level of 9.0% and 4.3% is made up of core inflation – i.e. goods and services, and the remaining 4.8% is inflation caused by the rise in energy prices and food. Thus, more than half of interannual inflation is caused by energy and food growth, not stronger aggregate demand itself. It is the commodity crisis and the lack of raw materials that are driving up prices. But the rise in interest rates may not help here, because it is the supply side – the supply of commodities – and that will not affect the ECB in any way by the rise in rates. Nevertheless, they will have to be increased similarly to the USA. Why? Therefore, the Fed currently has rates at the level of 2.5% and plans to increase them to 3.25% by the end of September. The ECB, on the other hand, has rates at the level of 0.5%, and if it were to leave them at their current level, the differential between the rates in the US and Europe would lead to further weakening of the euro, creating inflationary pressures, because imports from abroad become more expensive. Simply put, even if The ECB wanted to raise rates in a non-aggressive way, it will probably have to take a step with the USA, because the higher the differential, the bigger the problem it can mean for the euro. Initially, there was talk in the EU of a rate increase of 0.25% in September, but today they are flirting with the idea of 0.75% at the next meeting. The ECB thus gets into a deadlock situation – let him do the trick – it will bring problems. If he does not raise interest rates, inflation will become more entrenched. But if the ECB decides to raise interest rates, the southern wing of Europe will come under pressure, because their debts will be overpriced. Chart: Development of total inflation in the Eurozone
source: Trading economics
The American labor market began to deteriorate
The long-awaited deterioration of the US labor market has probably begun. The increase in rates since the beginning of the year has not yet claimed “any victims” in the form of a deteriorated labor market. He stepped on it at full speed and for one unemployed person in the USA, 2 new job positions were created. However, the development in recent months has started to deteriorate. and there was more talk about the possibility of a recession and the rise of costs for companies and the increase in credit. This is the reality today, and companies are increasingly postponing their expansion projects, slowing down capacity expansion, and building up reserves for worse times. There was a significant decrease in the number of newly opened job positions. And this is also the case with the first layoff. Unemployment in the US rose from 3.5% to 3.7% in the last month, which represents the first increase in the number of unemployed since the covid layoffs in March 2020. We expect that this is only the beginning of the entire deterioration of the labor market and we expect unemployment to grow to a level of at least 6 % until aggregate demand and inflationary pressures in the US fully decelerate. By that time, approximately 5 million people will lose their jobs in the USA. it smokes. Chart: Development of US unemployment
source: Trading economics
ECB, ECB and ECB
The new week will mainly bring the ECB meeting, which is expected to increase rates by 0.75%, which will bring the base interest rate to the level of 1.25%. This will be reflected across all rates in the Eurozone – from mortgages to consumer loans and loans for companies. The bells are expected to ring this week, as markets in the US will be closed on Monday for the Labor Day holiday. Investors’ attention will thus be focused on Thursday’s ECB meeting.