analysis
Inflation in the United States has come down surprisingly sharply. This makes it more likely that the US Federal Reserve will take a break from its series of rate hikes.
The inflation rate in the US fell surprisingly sharply in May. Consumer prices rose 4.0 percent year-on-year, the US Department of Labor said. Experts had expected a less severe decline. In April, the inflation rate was still 4.9 percent.
Overall, US consumer prices have been trending downwards in recent months. The inflation rate has been falling for eleven months in a row. In June last year it was 9.1 percent – the highest level in 40 years.
Inflation still above target
For the financial markets, the US inflation data are currently under particular scrutiny because they are highly relevant to the monetary policy of the Federal Reserve. Inflation in the United States is still well above the target of 2.0 percent, so monetary tightening is still considered appropriate.
The question is, however, for how long and at what pace. If US inflation falls, at least the chance that the Fed will hike rates more slowly and less sharply increases. In view of the interest rate decision on Wednesday, many market observers are already expecting an interest rate pause, even if it is still too early to give the all-clear on inflation.
At its next meeting, the federal government will “probably take the expected interest rate pause and maintain the key interest rate corridor at 5.00 percent to 5.25 percent,” commented Commerzbank experts Christoph Balz and Bernd Weidensteiner. However, it is far less clear whether this already represents the definitive end of the interest rate hikes.
What economists pay particular attention to
The reason for the considerations of the Commerzbank economists, who urge caution, is the so-called core inflation rate. This rate, which is also used to assess the situation, excludes energy and food prices, which are particularly susceptible to fluctuations.
According to experts, it reflects the general price trend better than the overall rate. Core inflation fell from 5.5 to 5.3 percent – economists had expected a slightly stronger decline of 5.2 percent.
Shaan Raithatha, economist at fund provider Vanguard Europe, therefore sees no turning point for US monetary policy in the current data: “According to our assessment, inflation will continue to decrease, but will probably remain above three percent by the end of the year. In this scenario, it is unlikely that the Fed will lower interest rates this year.”
Why monetary policy matters in the US
Investors in the stock market in particular are hoping that the Fed’s rate hikes, which have been sharp recently, will slow down. This could provide the impetus for further price gains. Not least because of this, the monetary policy of the Fed is also important for many people in Germany and elsewhere in Europe.
Finally, many have invested in retirement products, such as mutual funds, that generate returns through the stock market. A thriving US stock market has positive effects on the European and German stock market, which is often based on the so-called US specifications.
The Fed’s interest rate policy is also having a major impact on the economy. Too high interest rates could stall the US economy. Financing conditions for companies and private households deteriorate as interest rates rise. In view of the global economic network and the great dependence of the European economy on the United States and Wall Street, a US recession would also have significant consequences for the economy in Germany, which is currently developing rather weakly anyway.
Effects on the global economy
The foreign exchange market is also heavily influenced by US monetary policy. That is why the euro, for example, reacted with price gains today to the fact that an interest rate pause in the USA has become more likely, while the ECB is likely to raise interest rates again this week. High interest rates in the United States can result in investors preferring to invest their money in US bonds in order to increase the return on their investments.
A sharply rising dollar and high US interest rates therefore pose a major risk, especially for many so-called emerging countries. For one thing, many bonds are denominated in dollars, making repayments more expensive for highly indebted countries and companies. On the other hand, investors could withdraw their capital from these countries and transfer it to the USA in search of higher and safer returns, which could lead to turbulence on the global financial markets.
The most recent bank failures in the USA had shown that the Fed’s monetary policy also has negative effects on financial institutions. The global networking of the financial markets can mean that local banking crises initially spread and lead to problems in other countries as well.