Denver, Dusseldorf The price development in the USA is becoming more and more dramatic: In January the inflation rate reached its highest value since February 1982, as the US Department of Labor announced on Thursday. Accordingly, consumer prices rose by 7.5 percent year-on-year. Economists had expected an average increase of 7.3 percent. It was the fifth time in six months that inflation has come in above expectations.
The price increases were widespread. Gasoline, food, electricity and housing costs were among the biggest drivers in January. This weighed on the mood on the markets. The leading index Dow Jones, the broader S&P 500 and the technology stocks of the Nasdaq started with significant losses on Wall Street, but later narrowed them significantly. The prices for the two largest cryptocurrencies, Bitcoin and Ether, developed similarly.
The yield on ten-year government bonds, on the other hand, rose to over two percent for the first time since 2019. The abrupt turnaround in US monetary policy had already caused turmoil on the markets at the beginning of the year. Experts now fear further turbulence on the stock exchanges, but also on bonds.
The current numbers are increasing the pressure on the US Federal Reserve (Fed). Fed Chairman Jerome Powell had already signaled at the most recent Fed meeting in late January that key interest rates could rise again in March for the first time since the pandemic began.
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With inflation rising even faster than expected, this also fueled the debate about a rate hike of 0.5 percentage points. Patrick Harker, head of the regional central bank in Philadelphia, had already announced this at the beginning of the month. The interest rate steps are typically 0.25 percentage points.
“The Fed will make short work of it from March,” says economist Alexander Krüger from the Hauck Aufhäuser Lampe bank. The experts at Commerzbank are now assuming that the US Federal Reserve will tighten monetary policy at each of the upcoming meetings this year. Specifically, the economists expect six rate hikes of 25 basis points each and the announcement that bond holdings will be reduced.
Fear of inflation and concern about the reaction of the central banks had caused the worst start to the year in years on the bond market. Former President of the Swiss National Bank Philipp Hildebrand warns of further turbulence, also because many younger bond traders have little experience with a change in the monetary policy environment. The central banks should therefore make their plans to tighten monetary policy known in good time.
Real estate market as an important price driver
A major driver of US inflation is rents and home prices, which make up a third of the CPI. On average, rents rose by 14 percent last year. In cities like Austin, New York and Miami it was even up to 40 percent, according to data from the brokerage firm Redfin.
And Americans must brace themselves for the cost of housing to claim a growing portion of their income this year. The New York Fed expects an increase of 10 percent. The broker Zillow assumes a good 16 percent.
At the same time, many rent caps and moratoria that prohibited landlords during the pandemic from evicting tenants if they are behind on their payments are expiring.
Rising food and housing prices in particular “underscore our view that inflation is accelerating rapidly,” Capital Economics’ Andrew Hunter warns. Since the situation on the labor market is also exceptionally tense, “it is unlikely that the situation will improve in the foreseeable future”. The prospect of rising interest rates has already cooled the booming housing market somewhat.
But that doesn’t solve the problem: If prospective homebuyers can no longer afford the prices, they will rent longer and put even more pressure on the rental market. The USA suffers from an insufficient supply of houses and apartments. There are also shortages of building materials and workers.
Tight labor market
The low supply of houses leads to a vicious circle. Owners stay in their homes, even if they want to expand or contract – because they can’t find affordable alternatives. This drives up prices for the few homes that do come on the market, while also causing Americans to be priced out of the market. This in turn leads to rising rents.
What economists say about US inflation
This is also a problem for the Fed: After all, the central bank does not have the right tools to counteract a tight supply on the housing and housing market, Rick Rieder, head of investment at asset manager Blackrock, points out. “It’s difficult for the Fed to keep rents down when supply is too tight,” he told CNBC.
Rising prices for housing are significantly less volatile than the cost of food and petrol, for example. The tense situation on the real estate market will therefore continue to affect inflation figures for quite some time, even if other factors weaken in the coming months. The same argument applies to wage developments.
The unemployment rate in the United States recently fell to 3.9 percent. In practically every industry, companies are looking for employees. The lack of skilled workers sometimes also means that many companies cannot expand as quickly as they would like.
More: “Plenty of room for rate hikes” – Fed Chair Powell primes markets for significant turnaround.