Inflation in the US comes with frightening force

Currency depreciation

Inflation is back: In the US, worst expectations have been exceeded. The dollar will appreciate and also strengthen the inflation trend in Europe.

(Photo: imago images / Rolf Poss)

Dusseldorf Rescue and stimulus packages of historic dimensions, an ultra-loose monetary policy and an economy that is almost at full capacity – that couldn’t go well. The result is an inflation rate of 7.0 percent in December in the US.

These are dimensions that nobody would have thought possible a year ago. And those who always said it was a passing phenomenon are getting quieter.

Incidentally, also in the Council of the European Central Bank (ECB), where Director Isabel Schnabel recently warned, contrary to her previous statements, not to underestimate the dynamism of long-term price developments.

Inflation is back – and it’s coming with frightening force, and not just in the US. The worst expectations are exceeded month after month.

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The monetary policy turnaround that is now, and must be, pending in the USA will not only have an impact there. The rising capital market rates in the USA will act like a magnet – and attract capital. The dollar will appreciate, which will put the emerging markets, which are primarily indebted in US currency, into trouble and also intensify the inflation trend in Europe as import prices rise.

USA in a more comfortable location than Europe

Whether and to what extent the inflation trend will ultimately settle also depends to a large extent on people’s inflation expectations. These, in turn, arise from the question of whether they trust the central banks to resolutely combat the price hikes.

Here the US is even in a more comfortable position than Europe because, unlike the ECB, the Fed does not have to take into account over-indebted states that cannot afford high capital market rates under any circumstances.

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The following applies to both currency areas: The soaring national debt – in the USA it is almost 130 percent of the gross domestic product (GDP), in Europe because of the thrifty north only 100 percent – stir up the suspicion that the states might succumb to the temptation to fall through inflation to get rid of the debt.

History shows that the greatest source of inflation has always been the sovereign’s attempt to raise funds.

Finally, in the US there are also the political risks of the inflation trend. Nothing interests citizens as much as their economic well-being. Donald Trump will know how to use the topic of inflation.

If the Fed fails to get the problem under control, the Republicans could retake Congress in the midterm elections – and possibly pave the way for Trump back to the White House in 2014.

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