Inflation Is Approaching 2%, but the Fed and ECB Still Want More Guarantees to Pivot …
... at the risk of once again falling behind schedule, as they did when they had to raise rates in 2021.
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At the end of 2023, inflation had reached a plateau before a rebound that many believed to be temporary.
The figures published over the last few days in America and Europe confirm that inflation is returning to its expected downward path.
Whether in America or Europe, it is now clear that inflation is falling.
To measure inflation in America, the Fed mainly uses the PCE Price Index, which was published yesterday, February 29, 2024:
As you can see, inflation in America stood at 2.4% in January 2024. This is in line with expectations and down on December 2023, when inflation in America stood at 2.6%.
This is the lowest inflation figure for the Americas since February 2021.
Core inflation is also down at 2.8%, although slightly higher than the 2.8% expected:
Inflation is closing in on the Fed's 2% target, while everyone still remembers the panic when inflation reached 7.1% in June 2022, a few weeks after the start of the war in Ukraine led by Putin's Russia.
While the economy remains strong in America, the battle against inflation seems on the way to being won.
The same is true in Europe.
Inflation, for example, fell to 2.7% in Germany after 3.1% in January. Despite a 3.4% rise in service prices due to wage increases, inflation is set to rise by 6% in 2023. In France, inflation was down to 3.1% after 3.4% the previous month.
Eurozone figures were released a few hours ago. Inflation stood at 2.6%:
This is slightly more than expected but still less than in January 2024, when inflation stood at 2.8%.
Inflation is therefore back to where it was after the post-COVID catch-up period and before Russia invaded Ukraine. For 2024, forecasters are expecting inflation to reach 2.3% in the eurozone and 2.1% in 2025.
The 2% target, which no one can clearly explain, is therefore more than ever within reach of central banks such as the Fed and the ECB.
If I say that nobody can clearly explain why we need 2% inflation, it's because it's true. There is no academic basis for central banks' obsession with 2% inflation. None whatsoever. But bad beliefs among central bankers die hard.
Now that these figures clearly show that inflation is under control, you and investors the world over will be asking the killer question: what are the Fed and ECB waiting for to lower their key rates?
Nobody knows. Jerome Powell and Christine Lagarde will tell you that they're waiting until they're sure that inflation is under control before pivoting their monetary policies.
This brings us back to what they said in 2021, when it seemed clear that inflation was not temporary, despite Jerome Powell's claims. At the time, central bankers had waited too long to raise rates, making the task more difficult.
While the Fed can afford to wait until June 2024, given the current state of the US economy, this is not the case for the ECB, which, by waiting too long, runs the risk of provoking a lasting recession in the Eurozone.
But when all is said and done, it wouldn't be surprising if Jerome Powell or Christine Lagarde made yet another bad choice, or a good choice too late, which amounts to the same thing. After all, you don't change a strategy that loses every time!
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