馃捀 THE END OF THE HIGH INFLATION?: SMELLS LIKE 70s SPIRIT 馃捀
Based on July 2023 FED chairman declarations, inflation may be at the 2% target until 2024. The FOMC is still analyzing to cont8nue hiking interest rates if the next data suggest that. However, some analysts anticipate a slowdown in rate increases and even a reduction before the end of the year.
It is true that inflation has come down, but it seems difficult to bring down The Sticky Price Consumer Price Index (CPI). CPI is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis. One possible explanation for sticky prices could be the costs firms incur when changing price.
The current interest curve rate (Bond 10y - 2y) is inverted (below 0) now. It will help to CPI reduction. Nevertheless, the economic engine has changed, and the Nearshoring (regionalization) and future wars could impact on an increase due to limitation of supply chains. In fact, the lowest CPI index were from 1992 to 2022, the "best times of Neoliberalism", which is now over.... Or not?
Every central bank in the world has a dilemma. They need to avoid repeating the mistakes of the past and cut rates before the time comes to initiate a crisis. The positive is the re-industrialization (leading by nearshoring) can avoid a severe recession in the short term, but the cost could be more inflation. In addition, the measurement base will be low and subsequent measurements will reflect actual inflation, not a reduction made from a high base as in 2021 and 2022.
Another problem to put on the table is the government debt and a potential crisis about that. This problem may not impact in the short term but yes in the long (<2.5 years). By the moment, the challenge is to bring inflation below 4% and to make the purchasing power sustainable while social spending is claimed... And perhaps, wars favor destruction in order to build again, but at what cost?
The best analysis is yours!
J. Joel Padilla
Copyright: Joel Padilla 2023
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