US inflation rises at seven percent to its highest level since 1982 – economy

When Jerome Powell took a seat on Tuesday in conference room 106 of the Dirksen building in Washington to recommend himself to the members of the Senate for a second term as head of the US Federal Reserve, he had a message in his luggage that is hardly suitable for one Application speech is suitable. It read as follows: The party is over! After more than ten years of extremely low key interest rates and without any significant price increases, citizens, companies and politicians in the USA have to be prepared for the fact that the Fed will raise its so-called overnight target range several times over the next few months. Most experts expect up to three steps from a quarter point each to 0.75 to one percent. The finance house Goldman Sachs is now even assuming four increases, starting in March. Either way: The times when commercial banks were able to provide loans to builders, car buyers and companies willing to invest almost free of charge are irrevocably coming to an end.

How difficult the situation is for the Fed is shown by the latest economic data – above all the price development figures that were published on Wednesday: At exactly 7.0 percent, the inflation rate in December showed a seven to the decimal point for the first time in 40 years is a value that makes even notorious detractors increasingly nervous. The unemployment rate of just 3.9 percent also indicates that wage and thus also price pressure will rise rather than fall in the short term. At the same time, however, the latest labor market report once again demonstrated that the number of employees is still more than three million lower than before the pandemic began. The reason is apparently that many citizens have temporarily or even permanently retired from work for fear of the virus or for other reasons. In addition, the unemployment rate among African Americans rose from 6.5 to 7.1 percent in December.

Powell and his colleagues are faced with the problem of having to raise interest rates because of the growing risk of inflation without actually having achieved their stated goal of full employment beforehand. However, at his hearing in the Senate, the central bank chief tried to make it clear that stable prices and the lowest possible unemployment are not opposites, but are even conditional. “High inflation is a serious threat to achieving maximum employment,” he said somewhat stilted. In addition, it is especially the poorer sections of the population who have to suffer particularly from the rise in prices. If necessary, the Fed will accelerate the rate of its rate hikes in order to prevent the latest price trend from solidifying.

The Fed cannot do anything about factory closures and clogged ports

At the last meeting of the Fed’s monetary policy committee in mid-December, all 18 members stated that they expected interest rate hikes of between a quarter and a full point in 2022. This was remarkable in that three months earlier, half of the participants in the meeting had assumed that no tightening of monetary policy would be necessary in the new year.

Since the autumn, however, inflationary dynamics have sharpened again significantly, which is also related to the government’s aggressive budgetary policy. Both President Joe Biden and his predecessor Donald Trump had sent money or checks to the citizens of the country on several occasions to cushion the economic hardship of the pandemic. At the same time, companies were supported and unemployment benefits temporarily increased significantly. The financial cushion on which many families are sitting and which fuels consumption and thus also inflation is now correspondingly large. Because of the production downtimes in Asia, congested US ports and a lack of truck drivers, many products cannot be delivered or can only be delivered with a long delay, so prices are rising even further.

However, higher key interest rates do not help against such delivery bottlenecks, which is why the Fed runs the risk of dampening the upswing without solving the inflation problem. Conversely, however, people tend to forget that even with four or even eight increases, interest rates would still be low in a long-term comparison. In the ten years before the start of the global financial crisis in 2008, the guiding principles in the USA averaged around three and a half percent. From March, the central bank plans to stop buying government bonds and mortgage-backed securities worth billions, with which it has kept long-term interest rates low and supported the economy since the beginning of the pandemic.

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