The relief in the USA is great: inflation is finally going down. It fell more than expected in July, to 8.5 percent. This is good news for the US Federal Reserve (Fed).
After four interest rate hikes this year, the inflation rate is now weakening somewhat for the first time. That’s the right direction. But there is still a long way to go to achieve price stability. The decisive question now is how long rates will remain at this historically high level.
Therefore, the monetary politicians should not deviate from their course prematurely, but continue to raise interest rates with determination. Fed Chair Jerome Powell has announced plans to bring inflation back to the 2% mark. Having reacted too late to the soaring prices, he must now regain his credibility. And that’s only possible if he stays on course.
Also, the hardest part of fighting inflation tends to come at later stages. Rents have risen rapidly in the United States in recent months. And it will take quite a while for these to move back down, economists warn.
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The costs of doctor visits and health insurance have also risen significantly in some cases and are reacting comparatively slowly to rising key interest rates. Likewise, core inflation, which excludes highly volatile energy and food prices, picked up further in July.
Investors shouldn’t be fooled
The jubilation on the stock markets is therefore premature. There is a great wish that the good old days, when the central bank fueled the markets, come back, and as quickly as possible. But investors should not be fooled by this.
The Fed could have to raise interest rates significantly well into the coming year. The price risks are still great. This includes not only the shortage of skilled workers on the American labor market. New supply chain bottlenecks and geopolitical tensions could further push up prices.
More: Inflation in the US is moderating – but pressure on the Fed remains high