Dusseldorf/Frankfurt Inflation in the US fell further in August. The inflation rate was 8.3 percent, as announced by the US Department of Labor on Tuesday in Washington. This is less than in July, when it was 8.5 percent. In June, inflation was 9.1 percent. Economists had expected a drop to 8.0 percent in August.
Despite the somewhat weaker price pressure, most experts expect the US Federal Reserve (Fed) to tighten its monetary policy further. At the Fed meeting on September 21, most of them expect interest rates to rise by 0.75 percentage points to between 3 and 3.25 percent.
In view of the high inflation, the Fed has raised interest rates four times since March, most recently by 0.75 percentage points in June and July. Further steps are also expected in the coming months. The central bank believes price stability is guaranteed with an inflation rate of two percent.
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According to Thomas Gitzel, economist at VP Bank, the Fed will remain challenged. “With today’s figures, a rate hike of 0.75 percentage points in September is set in stone.” December to turn the interest rate screw more clearly than previously expected.”
Commerzbank economist Bernd Weidensteiner also points out that the August value is above expectations. The easing in price developments that the Fed was hoping for was a long time coming.
Different causes
Recently there had been hope that inflation would now fall more significantly. The background is the fall in commodity prices and the strong US dollar, which is close to a 20-year high against other major currencies. The high exchange rate is dampening import prices. In addition, the supply chain problems have recently subsided.
Even if US inflation is now below the level in the euro area, the reasons for the high price increases in the two economic areas differ. According to estimates by Deutsche Bank, this is mainly due to higher demand in the USA, which was fueled, for example, by the large economic stimulus package from President Joe Biden’s administration.
According to the bank’s calculations, demand accounted for 58 percent of the rise in core inflation in the US between April 2020 and February 2022. Only 31 percent were due to supply factors such as shortages of oil, gas and other raw materials, chips or supply bottlenecks.
In Europe, on the other hand, supply factors play a far greater role, above all the shortages of gas. Here it is more difficult for monetary policy to react. Because the central banks cannot open up new gas sources or build chip factories. If they raise interest rates and households or companies spend or invest less as a result, this mainly affects demand.
From the point of view of Deutsche Bank economist Jim Reid, the great importance of demand in the rise in inflation in the USA speaks for further tightening of monetary policy. “Rise rates are absolutely necessary to tame US inflation,” he concludes.
Another difference to Europe is the situation on the labor market. In the United States, the unemployment rate is currently around 3.7 percent, roughly the level that the Fed is aiming for full employment. In the euro area, on the other hand, it is 6.6 percent. Unemployment is comparatively high, especially in southern Europe.
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At her press conference in September, ECB President Christine Lagarde pointed out that there is currently an average of one applicant for every two job advertisements in the USA, while in the euro area it is one applicant for every 0.3 job advertisements.
This different starting point is also reflected in wage dynamics. The average hourly wage in the US rose by 5.2 percent in August. For the euro area, on the other hand, the ECB expects wage growth of four percent for this year.
Raised interest rate forecasts
The ECB raised interest rates in the euro area by 0.75 percentage points last Thursday. This was the largest increase in its history. Most economists expect the US Federal Reserve (Fed) to also hike interest rates by 0.75 percentage points next Wednesday.
For example, the investment bank Goldman Sachs and other institutes such as Nomura recently raised their interest rate forecasts accordingly. Goldman now expects a 0.5 percentage point hike for November as well, having previously expected a 0.25 percentage point hike.
The reason for this assumption is above all the very tight American labor market and the strong wage development there. More than 300,000 new jobs were added in August. Bank of America economist Michael Gapen said recent jobs reports do not suggest that employment growth has slowed significantly in response to the Fed’s tightening monetary policy.
In the USA, financing conditions initially eased in August. The trigger was a comment by Fed Chair Jerome Powell, who said at the end of July that US interest rates would henceforth be in “neutral” territory. On the other hand, at the end of August, at the central bank conference in Jackson Hole, USA, Powell took a sharper stance on combating inflation, which caused yields to rise again significantly.
Restoring price stability will require tightening monetary policy for “some time,” he said. And: The tools would have to be used “powerfully”.
Other central bank officials made similar statements. Fed Vice Chair Lael Brainard said the central bank must raise interest rates to a restrictive level and leave them there “for some time”. Fed Governor Christopher Waller also advocated another “significant rate hike.” For most observers, it is therefore taken for granted that the Fed will decide to raise interest rates again by 0.75 percentage points next Wednesday.
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