inflation VS deflation? forcasts on Q3 Economies between West and China (01)
Economic Resilience in the US and Europe continued amid continuous tightening monetary cycles
Since Q1 2023, Though overall nominal CPI in major developed economies such as the United States and Europe had fallen rapidly, core CPI excluding food and energy prices still remained much higher than historical average levels. In particular, the US core CPI was 4.86% in Jun,1.77 % higher than the overall CPI.Tracing it to its cause, have on a system, during the COV19,the fiscal and monetary stimulus policies launched by the central banks of developed economies such as the US Federal Reserve, led to abnormally strong aggregate money supply, plus the significant damage to human capital supply triggered by the epidemic,had indeed caused structural imbalances in the US and European labor markets, resulting in stubborn high core CPI. Considering this,though the US Federal Reserve pressed the “pause button” for the step-on interest rates hikes in June for the first time,but it has no better option but to proceed hiking interest rates by another 25 basis points to 5.25% to 5.5% on late July,hitting the highest point in 22 years,also during the same period, the European Central Bank and the Bank of England also chose to continue raising interest rates by 25 basis points and 50 basis points, and the Bank of Japan continued to adhere to the loose monetary policy stance. It echoed to the US Fed initial intention,though recent indicators suggested that economic activity had been expanding at a moderate pace, employment growth was strong and the unemployment rate remained low, but inflation remained elevated,thus,the policymaking Committee remained highly concerned about inflation risks and firmly committed to returning inflation to its 2% goal.
Meanwhile,it is worth pointing out,In the first quarter, the GDP growths of the United States and the Europe zone rose by 2% and 1.3% respectively year-on-year, exceeding market expectations and not sliding into total recession yet. From the Market fundamental side, strong employment, income and consumption supported the moderate growth of the US economy under the constraints of high inflation, high interest rates and high debts. From the perspective of labor supply, the COV19 epidemic had altered the labor market structure, the low-productivity contact service industry had give way to the high-productivity home office service industry such as information technology and financial services, thereby increasing the total labor productivity.
Having said all of the above,as the U.S. economic growth grew stronger than expected, the job market was tighter than expected, also the core CPI higher than expected,furthermore in consideration of US Fed Action Plan, with high possibility, it is considered that the US Fed may largely continue to raise interest rates at least 1–2 times in the last of 2023, each time by 25 basis points;also the Fed will not cut interest rates this year, later on,may cut rates while continuing quantitative tightening. Besides,It is an inevitable choice for the Euro zone and the UK to keep on raising interest rates to curb inflation.
