Strongly rising inflation
The situation, this time is complicated by the trend of inflation: the PCE index has reached 3.9% and, unlike what happens in the Eurozone, where the ECB can move with greater agility without risking compromising its objectives. – the rise also affected core inflation, the underlying inflation, which reached 3.4%. The PCI consumer price index even registered + 5.4% in June, with core inflation at 4.5%, the highest in 30 years. Real interest rates therefore fell further.
Core inflation at the wheel
While in monetary union we can safely speak of relative prices that move and affect the index, in the US the movement of prices therefore seems generalized. Before the lowflation, of low inflation, the core inflation American indicated the path that headline inflation would follow (the reverse was the case in the euro zone). However, it is not certain that the relationship has been preserved.
Beyond the tolerance threshold?
The new strategy of the Federal Reserve admits that inflation can rise and remain above 2% for a relatively long time, after it has been below for a long time: the objective is that on average and “over time” – two years ? five years? these are the most likely time horizons – two percent center. A rate of price growth of more than 3%, however, seems to be above the tolerance threshold of any central bank in advanced countries.
So far the Fed has been able to argue that inflation was temporary. The same expectations, in the market measures, seem to have cooled slightly and continue to point to a slightly faster price dynamics in the medium term – the five-year break even – than in the long term (ten years and beyond). In this sense, it seems fairly anchored, albeit at a level slightly above 2% (but risk or liquidity premia cannot be ruled out), and leaves the Fed relatively calm.
The US central bank, in the face of this situation and the new uncertainties on the progress of the pandemic, is called to an exercise of great balance. For September, on the occasion of the publication of the new economic projections – and the “dots” that indicate the forecasts of the central bankers on the future trend of rates – analysts and investors expect the FOMC, the monetary policy committee, to give indications on the new tapering, the reduction of purchases.
Some of them think that already in this meeting in July the Fed can give some indications on the modalities, without indicating the times. It is a classic exercise in managing expectations, never as delicate as this time: avoiding a new tantrum is an imperative, with a cost: that financial inflation, on assets, or even on consumer prices, gets out of hand.