Inflation is a complex and multifactorial phenomenon. Well, the prices go up and up all the time. And why are they going up now? Well, because there are factors that make production more expensive or difficult. For example, if there are fewer young people working, if commercial relations with other countries are broken, if more regulations are placed on companies or if they want to take care of the environment.
These things are good or bad depending on how you look at it, but the truth is that they affect prices. Before the pandemic, prices hardly went up and that was also a problem. Now, the problem is that downloading them is very difficult. The Federal Reserve of the United States wants inflation to be 2%, but it has a difficult time. It is as if he wanted to tame a wild bull with a paper whip.
The truth is that inflation is difficult to control. It turns out that there are many structural forces at play that push prices up, such as an aging population, deglobalization, technological regulation, and the ecological transition. These forces are the opposite of what happened during the pre-pandemic period, when inflation was too low. Now, the problem is that lowering inflation from 5% to 4% is easier than from 4% to 3%, and so on. The Federal Reserve’s target is 2%, but it looks like they’re going to be resisted.
Now, inflation in the United States is reaching very high levels. This negatively affects the economy and the purchasing power of citizens. It also represents a challenge for the United States Federal Reserve, which is the body in charge of regulating the country’s monetary policy. Its main tool is the interest rate, which determines the cost of money in the market. When inflation spikes, the Federal Reserve often raises the interest rate to curb consumption and investment, thereby reducing price pressure.
When the interest rate is low, credit becomes cheaper and more accessible, which stimulates the demand for goods and services.. This generates more income for companies and more employment for workers. However, cWhen the interest rate rises too much (as it does now), the opposite occurs: credit becomes more expensive and tightens, which discourages spending and production. This can cause an economic recession, with negative consequences for people’s employment, income and well-being.
The Fed has been raising interest rates to combat inflation for more than a year. They have already gone several times and have already reached 5%-5.25%. What does that mean? Well, if you want to buy a house or a car with a loan, it will be much more expensive than before. And not just you, but everyone. That is why home and car sales are down a lot. People prefer to wait for interest rates to drop or to save more money. Of course, that is if they are not left without work due to the recession that may come.
Of course we have won some battles against inflation. That is to be applauded… We are down a lot from the high we hit last June. But at the same time, we cannot turn a blind eye to the challenges that await us. In other words, we can’t get excited ahead of time… nor can we count on the egg in the chicken’s belly… The goal is 2%… And we still have a long way to go to reach it. We must remember that the closer we get to the goal… the harder it will be for us.
Now the Federal Reserve has a dilemma to resolve at its next meeting in June. Will interest rates continue to rise or will it take a breather? Well, it’s not easy at all. And it is that there is discrepancy among its members on how to proceed. Some believe that interest rates must continue to rise until inflation drops to 2%, which is their goal. Others say you have to stop and see what impact previous rises have. And it is that, if they cross the line, they can do more harm than good.
The market is betting everything on a pause. That is an illusion that has been created because the market would love to believe that the worst is over… and the best is yet to come. AND Of course, it is possible for the market to get what it wants. But don’t take it for granted… Because here anything can happen. The markets are very naive and we cannot rule out the possibility that, as has happened so many times in the past, the market is wrong.
The most important thing here is to be very attentive to the evolution of events that influence the economy. In other words, everything will depend on the data that is published on the main indicators… (inflation, consumption, labor market, etc.) The increase in labor costs, which reflect the rise in wages and social benefits, is especially affecting to the services sector, which is the one that generates the most employment. And this could become our big headache from now on.
Jerome Powell, the head of the Fed, will soon be speaking at an economic conference and perhaps give us some clue as to what he intends to do.. Meanwhile, financial markets are betting on the end of everything bad and the beginning of a new period of abundance and prosperity. But not everyone shares that optimism. Some analysts warn that inflation remains a serious problem and that the Fed will have to keep raising interest rates to contain it.
What will solve that dilemma? I repeat myself: The data from here on out. You have to pay attention to economic data… (inflation, consumption, employment, etc.) Labor costs are affecting the service sector, which generates a lot of employment. And this can be our great challenge.
Welcome, friend uncertainty! For this reason, it is important not to get carried away by market optimism or pessimism. The economy is complex and dynamic, and it can surprise us at any time. It is best to be informed and prepared to act prudently and responsibly.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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