After the surge in prices, towards a decline in inflation in the United States?

Is it the swallow that heralds spring? In April, the US consumer price index (CPI) rose 0.3% from March, when it was up 1.2% from February. This is the weakest increase in eight months. In one year, the rate reached 8.3% in April, moving more slowly than in March, which recorded a rate of 8.5%, according to data from the American Labor Office. However, inflation remains at its highest level in 40 years.

This slowdown – which is not strictly speaking – is mainly due to the drop in the price of gasoline, which fell by 6.1% compared to March. However, within a year, the latter show an increase of 43.6%. Furthermore, taking away the increases in energy and food prices, so-called core inflation rose by 0.6%, which doubled from 0.3% in March. Like general inflation, core inflation slowed over a year, to 6.2% from 6.5% in March.

Airline ticket prices skyrocket

The trend was supported by a spectacular increase in airline ticket prices, which increased by 18.6% in one month and 33.3% in one year. Similarly, in one year the prices of used vehicles increased by 22.7% and those of hotels by 19.7%.

This evolution of prices according to different products has become a headache for central banks, which must control inflation without depressing economic activity and fueling social discontent. Because inflation has negative consequences, for example on wages. Thus, even though the hourly rate in the United States rose 5.5% in one year versus 5.6% in March, with the inflation rate being higher than this for 13 months, it not only cancels out the growth in hourly wages, but it also erodes the purchasing power of American families.

This is what worries US President Joe Biden in particular, who recalled this in a press release published on Wednesday “reducing inflation was his main economic priority”while admitting that he was counting on the Federal Reserve to stem the rise in prices. The Fed has gradually tightened its monetary policy since the beginning of the year, in the form of a reduction in its asset purchase program and an initial rate hike in March. Earlier this month, he raised them again by 5 percentage points.

A proven framework

It is the action of central banks that can reduce inflation, credit analysts Colin Ellis and Atsi Sheth of Moody’s Investors Service confirm in a report. By studying the evolution of inflation in different countries for decades, they show that since the oil shocks of the 1970s it has tended to decrease. According to them, this is mainly due to the fact that “Many countries have adopted since the 1990s a framework in which to start from a target inflation rate (usually 2%), each central bank independently determines monetary policy through interest rates or quantitative easing “. It is this framework, tested for decades by monetary institutions, particularly in the United States and Europe, that has enabled these financial institutions to do so. “play a significant role in keeping inflation low”throughout this period, despite China’s entry into the international market, whose growing role in the global economy has had no noticeable effects on inflation.

This leads Moody’s credit analysts to consider it “Current high inflation rates are unusual” in the last decades. Indeed, the health crisis has created an unprecedented situation. This is also what explains why Jerome Powell, president of the Federal Reserve in the United States, or even Christine Lagarde, president of the European Central Bank (ECB), have long believed that inflation was “transitory” despite increases from month to month. The demand shock produced by the lockdowns to stem the Covid-19 pandemic around the planet is followed by the supply shock due to a strong economic recovery that has created bottlenecks that have disrupted global supply chains seemed likely to be absorbed in 2022.

But two other unprecedented events amplified the upheaval due to the pandemic: the European energy crisis that began in October 2021 and the Russian invasion of Ukraine on February 24. They accentuated the inflationary effect, forcing central banks to adopt their rhetoric.

Consequences on credit and debts

The price increase has not yet produced all its effects. “High inflation will depress real wages, consumption and growth this year”analysts at Moody’s warn, warning that it has also done so “consequences in terms of credit depending on the sector, producing effects depending on the nature of the shock, the degree of market power held by firms and the response of policy makers”.

These consequences are all the more important for economic activity as many companies around the world already have to contend with a high level of debt. Thus, on the eve of the Russian invasion of Ukraine on February 23, two economists from the International Monetary Fund (IMF), Ceyla Pazarbasioglu and Rhoda Weeks-Brown, warned: “At the end of 2020, corporate debt amounted to $ 83 trillion, or 98% of global gross domestic product. Advanced countries and China were responsible for 90% of the $ 8.9 trillion increase in 2020. . Now that central banks are raising rates to keep inflation in check, companies will see the cost of servicing their debt rise. peak of the crisis. Indeed, a rise in interest rates automatically makes business financing more expensive.

On Thursday, Jerome Powell also acknowledged that the rate hike would not be “painless”: if the economy develops roughly as expected, there should be further hikes of 50 basis points (half point) at the next two meetings “announced, while wishing to be extremely pragmatic in relation to the evolution of the situation: “if things go better than expected, we are ready to do less. If things go worse than expected, we are ready to do more”.

A maximum impact 18 months to two years later

For this reason, Moody’s analysts estimate that, according to their model, the monetary policies currently pursued by central banks, “in the absence of other shocks”, “it will help reduce inflation next year and lower it further in 2024, with a return to economic growth”. Because if the short-term deviations of inflation from the 2% target rate are significant, “It may take 18 months to two years for a change in policy rates to have the greatest impact on inflation.”believe Colin Ellis and Atsi Sheth.

The approach of these analysts is therefore in line with the continuity observed by the monetary policies conducted for decades in the various countries. It excludes a number of traditional explanations that divide economists as to the origin of inflation. Patrick Artus even felt last year that “a new theory of inflation” was needed.

The paradox of the norm

One of these points to the origin of the increase in the money supply. “As far as inflation is concerned, we know that factors such as strong energy prices and supply chain disruptions are at the center of the growing price discussions. But we also see that the central bank’s monetary generosity, which dates back several decades. ago, was a key element. The decoupling of the dollar from the price of gold favored significant monetary growth on a global scale in the 1970s, which was accompanied by a surge in inflation – and today the post-gold period. global financial crisis has seen a surge in monetary growth and a similar surge in inflation “Standard Bank economist Steven Barrow pointed out this week in a note about the collapse in cryptocurrency prices, adding that he knew his opinion was not shared by most experts.

Finally, Colin Ellis and Atsi Sheth empirically note that the framework adopted by central banks for decades has made it possible to keep the reference rates below 2%. The paradox is that this new normal for our economies depends on monetary policies defined as “unconventional”.

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