The last time prices rose as dramatically as they are now, a certain Ronald Reagan was in power in Washington. Olivia Newton-John, now 73, topped the pop charts, and Tom Brady, perhaps the greatest US athlete of all time, was in kindergarten. That was a good four decades ago, and since then there has not been a single month in the United States in which the inflation rate showed a seven or even an eight before the decimal point. Until this Tuesday: According to the Bureau of Labor Statistics in Washington, US consumer prices rose by 8.5 percent in March compared to the previous month. That was four times as much as the government wanted and, see above, the strongest increase since December 1981. In February, the inflation rate was already 7.9 percent.
This continues a trend that has caused great unrest among American citizens and companies, will further damage President Joe Biden’s reputation and is likely to prompt the US Federal Reserve (Fed) to raise key interest rates again, this time significantly, in the coming months. Quite a few experts assume that the monetary watchdogs will raise their most important guiding principle, the so-called overnight target range, by half a percentage point at their next regular meetings in early May and mid-June. The corridor, which had been close to zero for two years to combat the corona recession, would be back at 1.25 to 1.5 percent at the beginning of next summer. Low key interest rates tend to stimulate the economy, while higher rates are intended to slow down the economic upswing and prevent prices from overheating.
In China, millions of industrial workers are currently not allowed to leave their homes
Petrol, rents and groceries in particular became more expensive in March. One of the main causes of the price increase is the Russian invasion of Ukraine, which made oil, gas, coal, agricultural goods and raw materials so expensive. In addition, there are high levels of sick leave, exit restrictions and other restrictions as a result of the corona pandemic, which continue to lead to production downtime and massive delivery problems around the world. Many companies, politicians and central bankers are particularly concerned about the situation in China, where the spread of the highly contagious omicron variant is increasingly calling into question the previous zero-Covid strategy of President Xi Jinping’s government. Last week, local authorities in the People’s Republic ordered almost 200 million people – and thus tens of millions of industrial workers – not to leave their homes.
The question now is whether the upward trend in prices will continue or whether the Fed will manage to break the trend. Some US economists believe that inflation may have peaked at 8.5 percent in March, but will remain at similar levels for quite some time. The experts are not expecting a drop to an average of 5.7 percent until the fourth quarter of this year – a number that would still be well above the ideal value of two percent that the Fed is actually aiming for. The reason is that key interest rate decisions always have a delay of six to nine months on the decisions of industry, trade, service providers and other sectors of the economy.
In addition, with significantly more aggressive interest rate hikes, the central bank would constantly run the risk of overdoing it, stalling the upswing and plunging the economy into recession. Accordingly, Biden’s chief economic adviser Brian Deese admitted in a television interview earlier in the week that the US economy was “in difficult waters” given the situation in Ukraine and China. However, he didn’t want to know anything about an imminent recession. According to Deese, if there is one country in the world that is in a better position than any other major economy to master this difficult situation, “then it is the United States”.