Inflation expectations in the USA are declining significantly. The background is the fear of a recession that the US Federal Reserve could conjure up with its aggressive turnaround in interest rates.
At the end of the month, the US Federal Reserve will discuss how interest rates will continue at its next meeting. The next strong interest rate hike is in the room. Again, there could be a big 0.75 percentage point hike like the last session in early June. However, at least 0.5 percentage points are considered safe. The key interest rate is currently between 1.5 and 1.75 percent. According to forecasts, the key interest rate should reach the four percent mark by the end of the year.
The latest labor market report should confirm the Fed in its course. There was nothing in the June numbers to suggest a widespread recession. With 372,000 new jobs created, the labor market once again proved to be remarkably robust. Hiring was broad-based, indicating continued solid demand for labour. “Combined with increased wage growth, this will most likely keep the US Federal Reserve on its toes to implement its very hawkish outlook,” commented Christian Scherrmann, US economist at DWS, on the data.
And the inflation figures on Wednesday also showed how tense the situation is: In June, inflation rose by 9.1 percent – the highest value in over 40 years.
However, doubts about Fed Chair Jerome Powell’s course are growing. Because the price for falling inflation rates could be an outright recession. “I think the central bank is making a big policy mistake, it’s perhaps the biggest in the post-war period,” said asset manager Jens Ehrhardt in a recent interview with the “Handelsblatt”. “We’re talking about the fastest turnaround in interest rates ever. A soft landing of the economy is unlikely to work. There are already signs: applications for mortgage loans in the US have halved, new orders are slipping, and consumer confidence is at an all-time low.” But Powell will pull through, it’s a question of credibility.
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Concerns about the economy can be seen in various places: the price of oil has fallen significantly and is now only just above the 100 dollar mark. Metal prices have also fallen sharply. And last but not least, inflation expectations are also falling significantly. “US inflation expectations have recently been falling like a stone: those for the next twelve months, those for the twelve months after that and a little bit for the long-term,” Commerzbank wrote in a foreign exchange commentary last week.
“The fall in inflation expectations is likely due to the fact that the market is expecting a significant slowdown in the US economy, and with increasing probability a US recession as well.” Since the USA is one of the most important markets of all, the rest of the world would also experience an economic downturn.
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In the eurozone, the situation is completely different. Here, short-term inflation expectations for the next twelve months are picking up again. The high gas price ensures that the situation remains tense. In addition, the euro is losing more and more value. Even without price increases, the import of raw materials will become more expensive. “The rising import costs are fueling the already high price pressure,” writes the DZ Bank in a study. “The extreme price hikes in import and producer prices overshadow any gain that exporters can take from a weaker currency.”
The collective bargaining will now be exciting. In view of the high inflation rates, the trade unions in Germany are demanding substantial wage increases. Analysts at Capital Economics expect growth of four to five percent this year and around three to four percent next year. For workers, the increase would mean a real wage cut. After all, inflation is well above that. But it could be enough for companies to start raising prices again, analysts warn. “Wage deals could keep inflation high,” they fear.
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