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USA: It’s good that the inflation rate remains low despite the increase – VP Bank column

In a month-to-month comparison, consumer prices rose by 0.4%. Compared to the same month last year, the following applies: The inflation rate rose from 1.2% to 1.4% in August. Without the volatile energy and food prices, inflation would rise by an unchanged 1.6%.

The higher gasoline prices are now having an impact on inflation. Compared to the same month last year, the inflation rate of 1.4% remains at a relatively low level despite the increase. The unchanged core inflation rate meanwhile makes it clear that there is currently no overriding price pressure. The US labor market is still in dire straits given the economic fallout from the pandemic. Wage increases are hardly possible in such an environment, which is why no significantly higher core inflation rates are to be expected initially.

As much as the central banks would like to see higher inflation rates, behind closed doors the monetary authorities should be happy about the lack of significant inflationary pressure. Imagine for a moment if inflation rates rose significantly. The Fed or the ECB would have to take countermeasures in this case, possibly scaling back their securities purchase programs. At the same time, the financial markets would start betting on higher interest rates. This scenario would be poison for current financial market events.

In any case, the Fed is likely to look at the increased yields with suspicion. After all, the yield on a 10-year US government security is currently 1.12%, which implies an increase of more than 60 basis points compared to the Corona low in August 2020. Since the 10-year rate of return is also the benchmark for long-term financing, the increase could already have negative consequences for the real economy. Rising inflation expectations are responsible for the rise in yields. If the increased inflation expectations were now also confirmed by the actual inflation trend, this could immediately lead to the next increase in yields. The Washington monetary authorities should therefore be delighted that the inflation rate is relatively low at 1.3%.

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