Has inflation been tamed or not? – DW – 05/02/2024 | EUROtoday

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The US Federal Reserve’s announcement on Wednesday that it could not be chopping rates of interest any time quickly was not a shock.

For the previous few months, inflation has crept again up steadily, inflicting vital complications for policymakers, central bankers and traders who had been anticipating not one however a number of rate of interest cuts over the course of 2024.

The image just isn’t massively completely different in Europe. Germany’s inflation fee rose greater than anticipated in April, on the again of robust meals and power costs. That has additionally decreased expectations that the European Central Bank (ECB) will make a number of charges cuts this 12 months, as some had anticipated.

This latest information is “not really settling the issue of ‘the last mile’,” Francesco Papadia, a senior fellow with the suppose tank Bruegel and a former director common for market operations on the ECB, advised DW. “The news is not bad, but not as good as one may wish.”

That final mile he refers to is getting inflation right down to a constant fee of two%, a purpose which has been shared by European and US central bankers since they started tackling the worldwide surge in inflation which started in 2021 and peaked in the direction of the tip of 2022.

It leaves the US Fed in a very difficult place. “For the Fed, the threshold to raise rates is still greater than the threshold to cut,” Diane Swonk, chief economist at consultancy KPMG US, advised DW. “But they’re starting to both get pretty high.”

Inflation returns with a bang

From 2021-23, inflation charges around the globe hit their highest ranges in a long time as the worldwide economic system adjusted to varied shocks, from the COVID-19 pandemic to the conflict in Ukraine. Central banks responded with aggressive rate of interest hikes.

US rates of interest are presently at a 23-year excessive of 5.25% to five.5% whereas within the eurozone, the ECB is presently holding charges at file highs of between 4% and 4.75%.

“Interest rates are the main tool for the central bank to influence the economy,” stated Papadia. “The mechanism is simple — if you raise interest rates, investments go down because the cost of funding those investments go up. If you increase interest rates, you affect consumption, as people are then more likely to delay spending.”

For central banks dedicated to financial stability, “interest rate changes are the most important tool,” he added.

That helps clarify why the Fed and the ECB are each so cautious at current concerning doable rate of interest cuts. In late 2023 and early 2024, inflation charges had been edging nearer and nearer to the acknowledged 2% purpose and it appeared inevitable that the aggressive interest-rate coverage might be shortly rolled again.

he headquarters of the European Central Bank (ECB) in front of the Frankfurt skyline with the finance district, the river Main and the container harbor
Despite latest information, the ECB seems set for an rate of interest reduce in JuneImage: Getty Images/T. Lohnes

However, with inflation creeping again up, there are fears that fee cuts now might make the issue worse and push inflation even greater.

“It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2% inflation,” Fed chair Jerome Powell stated throughout his announcement on Wednesday. “I don’t know how long it will take.”

It leaves US policymakers in a considerably awkward holding place, in response to Diane Swonk. “They’re stuck waiting, and that frustrates financial markets,” she stated. However, she believes they’re extraordinarily cautious of chopping too early as evidenced in the direction of the tip of 2023, when they didn’t reduce regardless of falling inflation charges.

“The one thing the Fed has not done is to prematurely cut. It knows that is the biggest cardinal sin,” she stated. “They will not prematurely cut. They’ve been down this path before.”

European variations

In Europe, inflation seemed to be beneath affordable management till the latest information from Germany and Spain. However, ECB policymakers have strongly steered they are going to reduce charges for the primary time in 5 years at their June assembly, with eurozone core inflation on the entire slowing to 2.7% within the first quarter of 2024.

In the UK, outdoors of the EU however nonetheless a part of the general European economic system, rate of interest cuts are additionally anticipated quickly.

“I wouldn’t go as far to say that inflation has been tamed, but the outlook is certainly less concerning than it was in the middle of last year,” Andrew Goodwin, chief UK economist with Oxford Economics, advised DW. “We expect the Bank of England to begin cutting interest rates in the summer.”

While the European and US inflation conditions mirror one another to a sure extent, a key distinction in response to consultants is that European inflation has been largely influenced by power costs, whereas within the US, surging demand backed by a booming economic system has pushed costs again up.

“The situation is different in the United States, and the European economy is just not showing the same degree of buoyancy as the American one,” stated Papadia.

US Federal Reserve Chairman Jerome Powell explaining the central bank's rate policy during a news conference in March 2024
The robust US economic system is giving Fed chair Jerome Powell a headache and he is very cautious about chopping charges too earlyImage: Susan Walsh/AP/dpa/image alliance

Swonk agrees and says a key a part of the general story is what she calls the “remarkable resilience” of the US economic system that noticed the “fastest deceleration in inflation in nearly 50 years and the longest span of low unemployment figures since the 1960s.”

“To think that with all the rate hikes we had, the economy accelerated? That’s remarkable resilience and that’s good. The hard part is it also came with some heat.”

Interest fee hikes?

Now, the large query within the US is whether or not or not rates of interest will truly be elevated reasonably than reduce, a state of affairs that appeared unthinkable just some months in the past.

Powell steered this week that will not be the case however the stubbornly excessive inflation seen in latest months continues to solid some doubts. “It’s probably not as bad as it looks, but we won’t know until we get into the summer or into the late spring how much this is going to stick or not,” stated Swonk.

Edited by: Uwe Hessler