Also disappointing: Compared to the previous month, prices rose by 0.1 percent, compared to an expectation of minus 0.1 percent and unchanged prices in July. This shows that the pace of inflation has not yet clearly slowed down.
This is also confirmed by the so-called core inflation, which excludes the strongly fluctuating prices for energy and food: It was 6.3 percent in August after 5.9 percent in July.
According to economist Erik Norland of Chicago-based CME Group, falling energy costs and air fares have even kept reported inflation in check. On the other hand, housing costs in particular were higher than expected.
Top jobs of the day
Find the best jobs now and
be notified by email.
They play a major role in the reported inflation in the USA, whereby, unlike previously in the euro area, the costs of living in one’s own home are also included based on estimates. Groceries rose in price by more than ten percent.
According to Norland’s observation, the market reactions show that investors are now clearly expecting another interest rate hike by the US Federal Reserve (Fed) of 0.75 percent in September. Most experts are already expecting an increase of this magnitude to a range of 3.0 to 3.25 percent for the September 21 meeting, which US central bankers had recently signaled as well.
The markets reacted with significant discounts: the most important indices on Wall Street were deep in the red over the course of the year. Things also went downhill in Europe: after publication of the inflation data, the Dax lost almost 400 points by the end of trading.
Thomas Gitzel, economist at VP Bank, judges: “Should it turn out that inflation dynamics in the service sector remain high, the Fed will not be able to avoid turning the interest rate screw more significantly than previously expected at the interest rate meetings in November and December.”
For these, the forecasts were previously at 0.25 or 0.5 percent. 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.
Krugman sees “gigantic energy price shock” in Europe
US economists Paul Krugman and Larry Summers agree that both the Fed and the European Central Bank (ECB) must continue to raise interest rates. That became clear at an ECB conference to which the two were connected. Krugman emphasized that the situation in Europe is completely different from that in the USA.
While the economy in America has been running hot, there can be no question of that in Europe. The euro area inflation will be driven much more by a “gigantic energy price shock”. Nevertheless, in his opinion, the ECB has no choice but to continue to fight inflation with determination, also as a “precautionary measure” so as not to allow a dangerous momentum of its own in the first place. However, he sees it as a good sign that inflation expectations on both sides of the Atlantic are well anchored compared to the 1980s, when there had recently been high price increases.
Deutsche Bank makes a similar argument. In the US, inflation is mainly due to higher demand, which was fueled, for example, by the large 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.
>> Read also: “ECB interest rate hikes are exaggerated”: Criticism of the jumbo rate hike is getting louder
In Europe, on the other hand, supply factors play a far greater role, above all the shortage 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.
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.
Energy prices have also fueled inflation in the US, but not as much as in Europe. Recently, the price of oil has fallen again.
(Photo: AP)
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.
Ultimately, the main concern in Europe is to avoid so-called second-round effects, such as excessively rising wages, which in turn drive up prices. This effect is more noticeable in the USA; Krugman again admitted that he had initially significantly underestimated the inflation dynamics and above all wage growth in the USA.
He now expects only a slight recession for the USA, but a severe economic slump for the euro zone. Summers, on the other hand, also foresees a clear recession for the USA because there is no other way to bring prices under control. He emphasized that higher unemployment is also harmful from his point of view, but that the damage caused by unchecked inflation is ultimately even more dangerous.
Summers said he just looked back at the last inflation of the ’70s and ’80s. At that time there were similar soothing arguments for a long time as they are now. Effects were considered temporary and reference was made to stable expectations. In the end, however, the prices could only be controlled by sharply increasing interest rates.
Summers therefore urges that it is better to do too much than too little. When in doubt, he would prefer a full percentage point increase for the USA to half a point. Summers also said he missed a powerful, internationally coordinated response to the high price hikes.
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. The ECB raised interest rates in the euro area by 0.75 percentage points last Thursday. This was the largest increase in its history.
A series of breakdowns in communications
Inflation is a drama that initially started inconspicuously last year. Some economists such as Mohamed El-Erian and Olivier Blanchard warned early on that the Fed in particular was underestimating the dynamics of inflation.
But after prices rose significantly, especially in the summer, many economists and central bankers initially emphasized that these were “temporary effects”. Inflation then proved to be very stubborn as early as the turn of the year. Added to this was the war in Ukraine from February.
Even later there were repeated breakdowns in communication. 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. The markets reacted with a significant recovery.
>> Read here: Fund managers are more pessimistic than ever about the stock market
Then at the end of August, at the Federal Reserve Conference in Jackson Hole, USA, Powell took a sharper stance on the fight against inflation – as a result of which yields rose again significantly, which represents a tightening of conditions. Restoring price stability will require tightening monetary policy for “some time,” Powell 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”.
More: ECB fights inflation with historical rate hike – and paints a gloomy outlook