US inflation is at its peak but there is reason for optimism

Rising US prices have reached the fastest rate since 1981 – in March, inflation stood at 8.5%, above earlier forecasts indicating a rise of 8.4%. Fuel prices, which jumped by 18.3% in March as a result of Russia’s invasion of Ukraine, contributed their share to inflation. This is in addition to the many demands that have encountered supply disruptions due to the corona.

Also, food prices rose by 1% compared to February and completed a jump of 8.8% in the last 12 months. The main victims of food price increases are of course American households, especially those with low incomes who divert a significant portion of their income to current consumption.

Will the inflation rate start to fall?

If the increases in food and energy prices are neutralized, some consolation can also be found in the Consumer Price Index (CPI) for March. First, used car prices have fallen from the peak, which has managed to instill hope among some economists that commodity market inflation may start to cool after a dizzying jump for most of the past year.

In addition, after deducting food and energy items, the price index for March in the United States rose by only 0.3% – less than the expectation of 0.5%, which may be a turning point.

According to estimates by Goldman Sachs economists, March may mark the high point and it is possible that the rate of price increases will begin to decline in the coming months. This, among other things, is due to the decline in gasoline prices at gas stations in the US – according to AAA (the energy prices website of the largest companies in the US), the average gallon dropped to $ 4.10 on Tuesday, after the record high of $ 4.33 in March. And compared to $ 2.86 a year ago.

But despite optimism, inflation is expected to remain above the Fed’s target later this year. This is while the Fed changed world orders in an unprecedented way when last year it set the inflation target at an average of 2% in order to compensate for years of lack of inflation. Developments from the war zone between Russia and Ukraine do not bode well for commodity prices, which are expected to continue to fluctuate and provide pressure.

Interest rates will continue to rise rapidly

Inflation in the US began to climb sharply even before the war in Ukraine, but there is no doubt that the conflict added to the pressure on energy and commodity prices that are expected to fuel inflation.
“I am doing everything I can to bring prices down and take care of Putin’s price increases,” said U.S. President Joe Biden approaching the midterm elections, with cards not really playing in his favor.

Given the expectation of further interest rate hikes by the Federal Reserve, some economists estimate that consumers may begin to tighten their belts and subsequently lead to a slowdown in demand that created pressure on the supply chain. According to a Harris survey for Bloomberg, about 84 percent of Americans plan to cut spending as a result of rising prices. The biggest cuts include eating out and impulse purchases, along with driving and experiences like concerts and sports.
Unlike last year the Federal Reserve will not continue to wait for more data from the economy and have already started raising interest rates last month by 0.25%. Bank members have already signaled that they will continue to raise interest rates at a rapid pace in order to cool the economy in hopes of preventing sharp price increases from becoming routine.

Policy makers at the central bank are expected to raise interest rates by 0.5% at their meeting in early May and the market expects a similar increase in June as well.

Earlier this week, even before the publication of the inflation data, the deputy chairman of the Fed, Al Brainard, announced the beginning of a reduction in the Fed’s huge asset balance, which reached $ 9 trillion in May. (FOMC) that determine US interest rates.

Europe suffers from dependence on Russian gas

The surge in energy prices is rolling not only to the US but also to Europe, which is also suffering from Russian gas dependence. In the UK, it jumped 28.3% compared to March last year, and the price of fuel jumped 30%.
In Israel, on the other hand, the local economy enjoys gas districts that are signed at fixed prices and therefore the effect of energy prices is mainly translated into the price of fuel.

Therefore, inflation in Israel is relatively low and amounted to 3.5% in February. This allows the Bank of Israel breathing space. This is despite the fact that this week he joined the British Bank which was the first of the banks in the West to raise interest rates. Thus, in Jerusalem, too, they raised interest rates to 0.35% this week.

Inflation in the United States will have consequences for the entire world. If the rapid restraint succeeds there without significant damage to growth, the moderation of inflation may reach Israel as well, just as the central bank economists in Jerusalem predicted.

By Editor

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