Such inflation in the United States has not been seen since the global financial crisis of 2008. But the regulator refuses to tighten monetary policy. Deutsche Bank has already warned that inaction will not end well. This time bomb threatens the entire global economy.
Acceleration of inflation
In May, US inflation soared to five percent in annual terms. And the core consumer price index, which does not include volatile commodities such as energy and food, added 3.8 percent from a year ago — the highest since June 1992. Everything has become more expensive — cars, appliances, furniture, air tickets, clothing, and food.
World Bank economists say that most countries that use inflation targeting have nothing to worry about: the indicator will be able to return to the limits of the target range.
However, in the US, the situation is different. The Federal Reserve is idle. Back in March, the head of the Fed, Jerome Powell, said that he did not see a problem in temporarily exceeding the target of two percent.
The reasons for the crackdown on consumer prices are obvious. Since the beginning of the pandemic, the US authorities have already spent between six and nine trillion dollars on anti-crisis measures, running the printing press at full capacity. And with the arrival of Joe Biden, the country’s economy received almost two trillion more. This is a huge package of incentives, mainly social ones.
Huge debt and a weak dollar
The money flood increased the national debt by about a quarter. Now it is more than $ 28 trillion (almost 130 percent of the annual gross domestic product).
Economists have warned that new injections into the economy will no longer be good. The burden on the budget will increase; prices will rise — due to an overabundance of bills without a corresponding increase in production. The inflation risk is also reinforced by deferred consumer demand with a high level of excess savings. In the pandemic, American consumers have accumulated $ 1.6 trillion, which they are now starting to spend.
A powerful influx of newly printed bills hit the US currency. The dollar is getting cheaper, losing its appeal to investors. For 2020, relative to the euro, it fell from 0.8934 to 0.8149 — almost nine percent. In 2021, it may sink by another five or seven.
Another factor is the unprecedented pressure on the budget. In the fiscal year 2020, its deficit reached 16.1 percent ($3.1 trillion) — the highest since 1945, when the government allocated huge funds for large-scale military operations.
Still, the Fed has no intention of raising interest rates or scaling back its asset purchase program until it sees “substantial progress” toward economic goals, particularly a recovery in the labor market.
The regulator’s self-confidence and inaction raise questions.
“We need a clear plan of struggle. Fiscal policymakers need to understand who their decisions may harm. Eighty-seven percent of Americans are already concerned about rising prices. Mr. Powell must recognize the sharp jump in inflation and stop dismissing this serious problem as a temporary hindrance,” Senator Rick Scott said.
Economists also draw attention to the fact that the Federal Reserve completely denies a more disturbing trend — the formation of a global bubble in the stock market. By maintaining ultra-low interest rates and continuing to increase the balance sheet by $ 120 billion a month when the stock price is near historic highs, the Fed risks further overheating the market.
“The regulator only increases the chances of a hard economic landing and will eventually be forced to tighten monetary policy to reach the inflation target,” said Desmond Lachman, an analyst at the American Enterprise Institute.
The weak will suffer
However, this will create problems not only for Americans — for the whole world, analysts at Deutsche Bank warned. “The neglect of inflation in the US keeps the global economy on a ticking time bomb. The consequences can be devastating, especially for the most vulnerable segments of society,” explains the bank’s chief economist, David Folkerts-Landau.
In Germany, it is believed that inflation will continue and in the coming years will lead to a crisis, possibly as early as 2023. As experts specify, developing countries will suffer first of all. The depreciation of money in the leading economies increases investors ‘ expectations of a rate hike. This increases the yield on government bonds, which makes borrowing more expensive.
Thus, economists say, the beginning of the global recovery for emerging markets has turned from a positive factor into a threat: for example, in South Africa and Brazil, the cost of borrowing is close to dangerous levels. And there, public finances are already not very stable.
“It makes sense for these countries to worry more about US inflation than their own,” S&P Global Ratings experts point out.
Rich countries borrowed at very low rates during the pandemic — unlike many developing countries.
For example, Egypt has to refinance the debt this year, equal to 38% of GDP, and the cost of servicing the loan — 12.1%. For Ghana, the percentage is even higher — 15. Brazil has the same problems, where the Central Bank has raised rates twice since January to ease price pressures.
According to William Jackson of Capital Economics, Brazil is a prime example of how inflation and rising yields threaten economic stability. “This has led to a reduction in public finances and an increase in interest rates by the Central Bank, fueling the cost of debt service,” the analyst emphasizes.
The situation is saved by the fact that, for example, Brazil, South Africa, and India rely more on domestic creditors than on foreign ones. This reduces the vulnerability to capital outflows.