The rise in US inflation, which in May exceeded expectations by flying to 5%, for now does not seem to worry investors too much, as signaled by the positive closure of Wall Street, with a new record Thursday for the S&P index at 4,239. 31 points (+ 0.5%), while the Dow Jones gained 0.05% to 34,466.89 points and the Nasdaq 0.78% to 14,020.33 points.
Investors are betting that the Federal Reserve will maintain its accommodative monetary policy at its meeting on Wednesday, June 16 next week, despite overheating consumer prices.
Markets believe the Federal Reserve, led by attorney Jerome Powell, will hold ona promise of ultra-accommodative monetary policy for a long time until the recovery is consolidated. And then to the next meeting of the Monetary Policy Committee on June 16 will not change anything. According to the US central bank, not only is the price increase temporary, but full employment takes priority over prices in the short term, the Fed clearly indicated. Updating its monetary policy strategy, US inflation may temporarily increase above 2%, because from now on the target will be the result of an average over time Powell announced at the end of last August. And then, over the past few months, he repeated that results matter more than forecasts. But this is where the problems could arise.
Waiting for the results, what the increase in prices is consolidated for a certain period, hides the risk that when the Fed will intervene, by starting to raise interest rates and stopping buying securities on the market, it will already be too late to reverse the trend promptly. And this would cause the Central Bank to lose credibility however, its mandate remains price stability, as well as full employment. But credibility for a central institution is everything.
Almost a year after Powell’s announcement on the change in monetary strategy, US inflation rose well above the Fed target of 2%: after + 4.2% in April, the index rose to 5% in May, with an economic increase of 0.6% compared to April, which in turn had increased by 0.8% over March, bringing the price index to its highest level since August 2008, when it reached 5.4%. IS not only energy to fuel the flare-up in prices (unchanged in May), but also goods and services such as used cars and trucks (+ 7.3%) or airline tickets. The sudden increase in prices is a reflection of the robust recovery underway globally, and in particular in America, and the consequent increased demand for raw materials and essential components, such as semiconductors. So much so that the price increases and shortages of some materials and components are even starting to worry some industrial sectors, from cars to consumer electronics to household appliances.
Then there is the theme of work. The unemployment rate in the United States dropped to 5.8% and employment continues to improve, as reported by the latest data on claims for unemployment benefits. As of June 5, there were 376,000 applications, as reported by the Department of Labor. This is the best figure since March 14, 2020, at the beginning of the pandemic, less than expectations for a figure of 370,000. And it reinforces the belief that the Fed will wait a long time before starting to discuss tapering, to reduce the stimulus to the economy. The point is that the pandemic has also accelerated the digitization of the economy in the US e many changes in the labor market are structural, so some jobs will never return. Waiting for full employment could be a dangerous exercise. Rather, it becomes urgent – and this is also true in Europe – to use part of the huge resources to revive the economy for policies aimed at the retraining of the workforce.
If the economy continues to run and inflation continues to rise until the end of the year (the European Central Bank also revised its projections for the euro area upwards to 1.9% at the end of 2021, while leaving the monetary policy decisions), will not only provoke a rude awakening to investors, with a sudden fall in the value of their assets, but also to the emerging economies linked to the dollar, already brought to their knees by the pandemic crisis.