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Some analysts suppose that the US may face an inflationary spiral due to unresolved problems, the main of which is surging inflation.
Most experts are sure that the Federal Reserve is not able to cope with the existing problems. Being unable to tamp down the skyrocketing inflation, the regulator has no way to boost confidence in the US economy. The key reason is that the Fed failed to retain inflation at a stably low level. In other words, it has lost control over the situation.
Notably, the Fed has a wide spectrum of financial instruments that may limit inflation. However, it is not applying them in an appropriate way. Against the backdrop, the US economy has overheated. Some economists believe that inflation has already reached its peak, whereas the targeted level of 2% remains unattainable. In March 2022, the US consumer prices were 8.5% higher than a year ago. Thus, inflation has touched its highest level last seen 40 years ago.
However, record paces of inflation growth were recorded not only in the US but also in the eurozone. There, consumer prices soared by 7.5%, while the UK reported a 7% jump. A rise in Europe’s CPI was caused by more expensive energy resources. Sanctions on Russia imposed amid the Russia-Ukraine conflict only added fuel to the fire.
In the US, inflation was also boosted by a rise in energy prices as well as higher prices of food, houses, and new cars. At the same time, food is getting more expensive against the background of problems with fertilizers supply. The US market was also hit by global supply chain disruptions.
Low unemployment rate and rising wages are other reasons for climbing inflation. Such conditions were created during the pandemic when the US authorities were pumping up the economy with money.
To stabilize the current situation, the Federal Reserve has to aggressively tighten its monetary policy by raising the benchmark rate and reducing the volume of bond purchases. This is how the regulator is trying to limit the amount of money supply and consumer spending.
Nevertheless, the US targeted inflation level is still at 2% per annum. Some analysts think that the regulator is doing everything in its power to achieve this level. Recent estimates unveiled that inflation may return to 2% only in 2024. In addition, the economic recession anticipated in 2023 will hardly affect the current prices. To reach the targeted inflation level, the regulator will hike the key interest rate to 2.5% by the end of 2022.
Meanwhile, some experts suppose that the regulator should take some additional measures to cope with soaring inflation. For example, it may rebalance the economy, thus increasing prices amid bigger companies’ expenses.
At present, most countries are combating galloping inflation. However, alarming trends in the US economy have a negative effect on other states, which have to buy much more expensive US goods. Therefore, rising import prices are a double-edged sword, which makes suffer both the US and other countries.
Published 20 May 2022
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© Instant Trading EU Ltd
