Finance & Economics

ECB’s Inflation Challenge Resembles Similar US Problem

In the eurozone, the inflationary process has still not returned to the territory of acceptable and favorable indicators, which is why there is currently an increase in fears that the European Central Bank, as part of its movement towards easing monetary policy by cutting interest rates, may face the same problems and obstacles that have become a kind of restrictive circumstances for the Federal Reserve System in terms of the current configuration of economic reality in the United States.

ECB’s Inflation Challenge Resembles Similar US Problem

Many experts say that on both sides of the Atlantic Ocean, the same or at least largely similar barriers are being fixed in the direction of lowering the cost of borrowing. At the same time, analysts clarify that the driving forces of price growth in the eurozone and the United States are clearly different. But this circumstance does not negate the fact of significant similarity of other realities in the economic spaces of the mentioned regions of the world. Experts warn the ECB against the risk of underestimating the probability of longer-term price pressure.

Currently, there is widespread expectation that the main European financial regulator will decide on Thursday, June 6, to cut the deposit rate from a record high of 4%. The prospect of this action by the ECB as a whole is not the subject of discussion in the context of its realism and is not considered through the prism of doubt in the expert community. In this case, the main negative probability is that against the background of steady inflation, which is currently observed in the United States, subsequent quick decisions and actions by the European financial regulator after June 6 will be extremely problematic from the point of view of the possibility of implementation. The Fed has already been forced to reconsider monetary policy easing measures. The central bank of the United States is taking an extremely cautious approach regarding the potential lowering of borrowing costs. The Fed’s attitude in the context of readiness to ease monetary policy has changed significantly after a price increase was recorded in the US, which exceeded preliminary expectations regarding the pace of the dynamic of this indicator. Traders are still hoping that the central bank of the United States will start cutting interest rates in 2024. It is worth noting that the corresponding probability is quite realistic, but its materialization in the financial and economic plane will obviously not take place in the coming months.

Carsten Brzeski, global head of the ING Macroeconomic Research unit, says that the US problems of persistent inflation may yet become a factor of sensitive impact on the situation on the other side of the Atlantic Ocean. The expert says that for the ECB, in the appropriate context, a reasonable position could be to refrain from unequivocally denying the likelihood of a reflation scenario, which is currently observed in the United States, and remain cautious.

Inflation data for May in the eurozone did not turn out to be an example of a favorable state of affairs and did not become a source of optimism for assessing the prospects of the near future. Prices in this region last month showed an increase of 2.6% year-on-year. Also, the inflation data for May became something of a wake-up call for the ECB. At the same time, even greater pessimism among officials was formed against the background of a sharp rise in prices for services and an unexpected increase in underlying pressure.

At the same time, the dynamic of the inflation in May did not become what can be described as a shock experience for the ECB. During the previous months in the eurozone, the growth in the cost of goods and services was on a very confident downward trajectory, generating a kind of platform for optimistic sentiments about the economic outlook. The May data indicate that the path of the European financial regulator to its 2% inflation target is a difficult one. This situation is very similar to the state of affairs in the United States. About a third of economists surveyed by the media say that price growth in the US is outpacing the pace of a similar process in the eurozone.

At the same time, it should be mentioned that the upward trajectory of inflation in the United States is driven by enormous fiscal stimulus. A similar economic reality in the eurozone emerged after the energy crisis, which became an objective fact in this region in 2022. At the same time, the drivers of continued price increases on both sides of the Atlantic Ocean are not very different from each other, especially in the context of the reasons for their sustainability.

Continuing the mentioned reasoning, Andrzej Szczepaniak, economist at Nomura, mentions the growth of gross domestic product, which turned out to be stronger than preliminary expectations, the prospect of economic recovery through rising consumer activity, and a record low unemployment rate, which significantly increases wages. The expert also noted that robust demand allows companies to pass higher costs to consumers.

Konstantin Veit, portfolio manager at Pimco, characterizes inflation as highly correlated globally. This means that problems with excessive and beyond-expectations price increases in the US are likely to have a certain impact on the economic situation in the eurozone. The expert also mentioned ECB Executive Board member Isabel Schnabel’s speech in 2022, during which she discussed tangible evidence of the globalization of inflation. Bundesbank President Joachim Nagel said in April during a conversation with media representatives that high consumer prices in the United States teach a humble attitude to the problem of inflation.

ECB President Christine Lagarde and many experts still do not pay attention to the correlation between the economic situations existing on both sides of the Atlantic Ocean. The head of the mentioned bank stated that the two economies are not the same thing.

Holger Schmieding, chief economist at Berenberg Bank, says that the cause of the inflation in the United States has not yet been resolved, noting that final domestic demand continues to be on a trajectory of active growth. The expert said that the shock associated with the energy crisis has largely been overcome in the eurozone, but the economy is weakening which is reason enough for cutting interest rates as quickly as possible.

Katharine Neiss, chief European economist at PGIM Fixed Income, says that the inflation picture in Europe is clearer than in the United States. According to the expert, there is more significant progress in the eurozone towards the target growth in the cost of goods and services than in the US, where the corresponding situation continues to deteriorate.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.