Due to the production problems with new cars, prices for used cars rose by 1.5 percent.
(Photo: AP)
New York, 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. In December, the value was still 7.0 percent.
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. Core inflation, which excludes volatile energy and food prices, rose to 6 percent. Experts had expected a value of 5.9 percent.
Food, electricity and housing expenses proved to be the main price drivers. “A look at the details continues to show relatively broad inflationary pressure across the most important groups of goods,” commented Commerzbank economists Christoph Balz and Bernd Weidensteiner.
Alexander Krüger from Bankhaus Hauck Aufhäuser Lampe now sees the US Federal Reserve (Fed) as having an obligation: “The pressure on the Federal Reserve to step on the brakes with determination is increasing.”
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At the most recent meeting in January, Fed Chairman Jerome Powell signaled that interest rates should rise from March in order to get inflation under control. Now the possibility of more aggressive rate hikes is increasing, said Naeem Aslam, chief market analyst at brokerage firm AvaTrade. He expects the rate to rise by a total of 100 basis points by July.
Significant interest rate hike possible
Before the inflation figures, most investors had expected interest rates to rise by 25 basis points to a range of 0.25 to 0.5 percent in March. However, they now estimate the probability of a first rate hike of 50 basis points in March at around 50 percent. Before the numbers, the rate was around 30 percent.
Several Fed members had recently signaled that a more significant increase was possible. In a speech on Tuesday, Loretta Mester from the regional Cleveland Fed advocated raising interest rates faster than when interest rates were reversed in 2015. “Inflation is significantly higher and the labor market is significantly stronger,” she pointed out.
Patrick Harker, chief of the Philadelphia Fed, also said earlier this month that a “spike” in inflation would call for a more aggressive stance. An increase of 50 basis points would then be possible as early as March.
The inflation figures caused movement on the financial markets: The German leading index Dax lost 70 points and turned 0.3 percent into the red, as did the EuroStoxx 50. The US indices S&P 500 and Nasdaq 100 were also in the red before the market. Prices also fell on the crypto market, Bitcoin fell from $44,900 to $43,500.
US bond yields hit two-year highs
Bond yields, on the other hand, rose – the benchmark ten-year US Treasury bond approached the 2.0 percent level and rose to its highest level in two and a half years. The dollar index, which reflects the exchange rate for important currencies, also benefited from the figures with a price increase of up to 0.4 percent to 95.92 points.
According to the economists at Commerzbank, however, US inflation has probably not yet peaked with the most recent increase: “However, we expect only slightly higher rates in the coming months.” The inflation rate should then fall from spring – also because the price-driving delivery bottlenecks should tend to ease over the course of the year. “Due to the sharp rise in wage costs, the price pressure should remain higher than before the pandemic.”
What economists say about US inflation
Jochen Stanzl, chief market analyst at CMC Markets, also expects price pressure to continue: “Companies have used the pandemic to justify supply bottlenecks and the loss of services. In all likelihood, they will now use the pandemic again to raise their prices significantly. As a result, the inflation rate is likely to remain high for a long time to come.”
The Fed is likely to try to counteract this development. Not only does it want to raise interest rates, it also wants to unwind the bond-buying program introduced during the pandemic beforehand. The Fed was at times buying $80 billion a month in Treasury bonds and $40 billion a month in mortgage-backed securities (MBS).
In addition, the Fed is planning to melt down its total assets, which had grown to almost nine trillion dollars during the corona crisis. This would deprive the financial markets of liquidity. She can proceed relatively gently and no longer replace expiring papers with new ones. But Fed Cleveland Chair Mester suggested on Tuesday to sell the mortgage bonds. That would be the more aggressive option and could accelerate the process announced by Fed Chairman Powell to focus the Fed’s total assets on government bonds again.
More: “Plenty of room for rate hikes” – Fed Chair Powell primes markets for significant turnaround.