Worry about the consequences of persistent inflation.
(Photo: AP)
New York, Dusseldorf The inflation rate in the USA fell again slightly in April. Consumer prices (CPI) in the world’s largest economy rose by 4.9 percent compared to the same month last year. This was announced by the Department of Labor on Wednesday. Experts had expected a slightly higher rate.
The new data is likely to again trigger mixed reactions from US monetary authorities – and increase speculation about the Fed’s future course. The central bank considers a rate of two percent to be optimal.
The price pressure in the world’s largest economy has recently weakened significantly, and the inflation rate has now fallen for ten months in a row. However, there is increasing concern about the consequences of persistent inflation. This is also reflected in a comparison of prices to the previous month: Accordingly, consumer prices rose by 0.4 percent after 0.1 percent in March. That means: The same shopping basket was 0.4 percent more expensive in April 2023 than in April 2022.
Another indication that higher prices are having a broader impact is the development of core inflation. At 5.5 percent (March: 5.6 percent), the rate adjusted for energy and food is again above the general inflation rate.
Housing costs rose again the most, at 8.1 percent. Food prices rose by 7.7 percent (8.5), while energy cost 5.1 percent less (minus 6.4).
Some economists see signs of an improvement in inflation soon. Frederik Ducrozet, chief economist at Pictet Wealth Management, pointed out in advance of the new data that, according to the NFIB association, medium-sized and small companies no longer want to raise their prices. “There is no question that US inflation is sticky. But companies’ inflation expectations are collapsing,” Ducrozet commented on Twitter.
The Fed raised interest rates again last week to a range of 5.0 to 5.25 percent, the highest level in 16 years. At the same time, the central bankers indicated an interest rate pause for the summer.
Higher interest rates have a delayed effect on the economy. However, the many dynamic increases in recent months have long been noticeable. This week’s quarterly Fed survey (Sloos survey) shows that US banks have tightened lending requirements. Demand for personal and corporate loans has also weakened.
The turbulence in the banking sector is also contributing to this. As a result of the crisis in the regional banks and the events since March, experts say that many financial institutions have tightened their lending guidelines in anticipation of higher default rates and stricter regulation
>> Read here: Five reasons why inflation is so persistent
Other indicators, on the other hand, testify to the robustness of the US economy. Significantly more jobs were created in April than forecast. The unemployment rate also fell again slightly to 3.4 percent. The job data suggest that the economy is coping well with the many rate hikes. Cooling is not in sight.
Therefore, further increases in interest rates are quite realistic, said the influential head of the New York Federal Reserve District, John Williams, on Tuesday. “We didn’t say we were done.”
The Fed’s reputation has been tarnished
The reputation of the central bank has suffered noticeably in the USA in view of the high inflation and the banking crisis – the Fed had admitted that it had made mistakes in dealing with the situation. According to a Gallup poll, confidence in Fed Chair Jerome Powell’s leadership has fallen sharply. Only 36 percent of respondents trust Powell to do or recommend the right thing for the economy.
“This is not surprising given the recent evidence of Fed misconduct in banking regulation and supervision, which joins a long list of negligence in analysis, outlook, action and communication,” commented capital markets expert Mohamed El-Erian on the loss of confidence. Still, this is bad news for the effectiveness of central bank policy and for the integrity of the Federal Reserve institution.
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