Saturday, September 24

Inflation in the United States shoots up again and brings the dollar to parity with the euro


Updated

Energy and food have been the engines of the explosion in prices in June, which rose 9.1%, three tenths more than what the market predicted

Press conference of the President of the United States Joe Biden after the end of the summitALBERTO DI LOLLI
  • markets The euro reaches parity with the dollar due to fears of recession for the first time since 2002

day of records Inflation in the United States, at 9.1%, is at its highest point in 40 years and 5 months. The CPI for June, 1.3%, the highest in 16 years and 9 months. And the dollar, at parity with the euro, for the first time in 19 years, and 6 months.

It all started with the June inflation. The market expected 8.8%, that is, two tenths more than in May. So the data was shockingly bad. The experts closest to the president of the United States, Joe Biden, immediately launched a signal of calm: the tensions in prices are not going to last. That is comforting, until it is verified that in the spring they said the same thing, and also in 2021. As long as their predictions do not improve, The United States will end up like Argentina.

The truth is underlying inflationwhich excludes the most volatile elements of the index (fresh food and energy) fell from 6% in May to 5.9%. That’s a consolation, no doubt. And good news, because it indicates, at least in theory, that increases in energy and food prices are not being passed on to the rest of the economy, nor are economic agents incorporating them into their expectations. The problem is that analysts expected it to fall to 5.7%. So, at most, it can be said that there has been a tie in that chapter. All this for not remembering that, as much as underlying inflation invites relative calm, the average American has to eat and use the car, so the distinction between general and core inflation matters little to him.

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There is no doubt that energy and food have been the driving forces behind the explosion in prices in June. The first of these chapters grew by 7.5% in the month, and is now up 41.6% year-on-year, something not seen since April 1980. So there is some room for manoeuvre. So far in July, the price of a barrel of ‘Brent’ oil has fallen by 10%, so things are expected to improve this month. Of course, this improvement is not because there is more oil, but because the economy is slowing downand the market anticipates less energy demand.

And it is that, as misfortunes never come alone, the inflation data came a day after the International Monetary Fund (IMF) cut its US GDP growth forecast for this year from 2.9% to 2.3% , and would leave it at a minuscule 1% by 2023, seven tenths less than the previous forecast. It shows how fast the economy is slowing down is that the forecasts that have now been modified had been made just three weeks ago. The IMF itself hinted that things could get worse, stating that it is “a growing challenge” to avoid a recession in the world’s largest economy.

This disaster on the price side leads to the question of the dollar. If anyone had any doubt that the Federal Reserve was going to raise interest rates by three-quarters of a point at its next meeting in two weeks, forget it now. It is more: the question now is whether in October the ‘Fed’ will raise the price of money again by another 0.75%, instead of the expected 0.50%. It is still too early to accurately predict what will happen. But inflation, again and again, is pulverizing forecasts. Because, on top of that, the US is, as Silvia Dall’Angelo, from the US fund Federated Hermes, explains, with “a tense labor market”, since its birth rate of 3.6% indicates that in practice there is no unemployment, which , in turn, pushes up wages. And, with them, to prices.

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The rise in rates also pulls up the dollar, because it increases the profitability of the debt in that currency, so that the parity between that currency and the euro seems to last and, probably, will end up generating a situation in the ‘greenback’ is clearly above the European currency. Because the eurozone is in a similar situation, only worse, than the US. Inflation is also rising, and economic growth is plummeting. Add to that Germany’s dependence on Russian gas, and the market understandably assumes that at least that economy is going into recession. So it is normal that the dollar continues to rise, not only against the euro, but against practically all the world’s currencies. Unfortunately, the combination of inflation and low growth is not a problem unique to the United States, but something that is shared by virtually every country in the world.

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