Inflation slowed more than expected in July in the United States, fueled by falling gasoline prices at the pump, bringing a breath of fresh air to Joe Biden just months before a crucial election. However, he holds himself to a very high standard. Consumer prices rose 8.5% in July year-on-year, according to the Consumer Price Index (CPI) released Wednesday by the Labor Department, after rising 9.1% in June, a 40-year high. This is better than expected as inflation was expected to be 8.7% in July, according to MarketWatch consensus.
And throughout a month, inflation is even zero, which means that prices, against all odds, have not risen from June, when they rose 1.3% last month from May. Inflation is still at a very high level, which could lead the US central bank (Fed) to raise interest rates again at its next meeting in September. The IPC index is a particular reference to index pensions. These figures delighted Wall Street, which was preparing to open strongly higher.
The dollar, on the other hand, fell. By 2:45 p.m., the dollar was down 1.21% against the European currency at $1.0338 per euro, and was down 1.32% at $1.2243 per pound. For a year and a half, prices had barely stopped rising in the United States, eroding household purchasing power. And by extension, the Democratic president’s approval rating.
His opponents accuse him of having an inflationary economic policy, due in particular to his generous stimulus plan in March 2021, just after his arrival at the White House. Republicans renewed their criticism with force on Sunday, with the approval in the Senate of Joe Biden’s “Inflation Reduction Act” on climate and health, which they instead accuse of generating unnecessary public spending.
The Federal Reserve on the move
The question now is whether it will be possible to reduce inflation sustainably, without plunging the world’s largest economy into recession, after two-quarters of GDP contraction. The Fed, which is on the move, seeks to cause a voluntary slowdown in consumption, to relieve pressure on prices. Thus, it has raised its reference rates four times, now between 2.25 and 2.50%. The increase encourages commercial banks to offer their commercial and retail customers loans with higher interest rates. And the longer inflation stays high, the more the Fed will raise rates.
Another measure of inflation, the Fed’s preferred PCE index over the CPI, had shown an acceleration in June, to 6.8% year-on-year. Inflation was struggling, however, before the pandemic, to reach the 2% considered healthy for the economy. But it accelerated with global supply chain disruption and labor shortages in the United States, as American households consumed in a frenzy.
Added to this was the war in Ukraine, which sent fuel and food prices skyrocketing. Especially since the US labor market is still very dynamic. And in July, the unemployment rate fell again to 3.5%, as before the pandemic. But there are still almost two vacancies for every available worker, driving up wages and contributing to inflation.
Source: BFM TV
