Inflation in the US has risen to the highest level in more than 40 years. Inflation rose to 9.1 percent in June, while it was still 8.6 percent in May. Inflation plays an important role in the US Federal Reserve’s interest rate policy. Hence the financial markets were eagerly awaiting this number.
Inflation has been higher than expected, with economists expecting an average of 8.8 percent. Inflation in the US is driven mainly by a sharp rise in energy prices due to the war in Ukraine, but also by higher prices for food and other commodities and goods. High inflation undermines the purchasing power of American households.
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‘In particular core inflation is higher in the US than in Europe. It’s not just about food and energy prices, you see it everywhere. This is mainly due to a very tight labor market. But home prices, which account for one-third of the total consumer price index, are also rising and are expected to rise further. It also indicates that it will be very difficult for inflation to come down this year or next,” says Philip Mere, US strategist at Rabobank.
Interest rate hike
To deal with high inflation, the central bank raises interest rates. Last month, the central bank raised interest rates by 0.75 percent, the biggest rate hike since 1994. The central bank may raise interest rates again by three-quarters of a percentage point later this month. It is feared that these interest rate hikes will lead to an economic recession in the United States.
But according to Mary, the central bank has been lagging for almost a year. “The central bank is sleeping. Inflation was already climbing last year and it wasn’t until November that they felt they had to do something. The first interest rate hike isn’t until March.’
Fighting high inflation is a priority for President Joe Biden’s administration. Its popularity is under pressure from a sharp rise in consumer prices, as households are hit hard financially. Biden has already released oil from strategic reserves to lower fuel prices at the pump. He has also criticized major oil companies for not doing enough to counter high oil prices.
Biden will travel to Saudi Arabia this weekend. He will then ask the country to increase oil production through the oil giant OPEC to help lower prices. Saudi Arabia is considered the leader of OPEC and is one of the world’s largest oil exporters.
And in the American business community, according to Mary, ‘fighting hyperinflation is paramount’. “America cares less about the economy as a whole for that matter. First inflation has to leave the economy, only then can you get sustainable sustainable growth again. Things are getting out of hand at the moment, which means the low-income earners will be hit the hardest. That’s bad for economic growth,’ says Mary.
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