untitled design

Inflation: How it affects economic policy in the Eurozone and the US

The escalation of inflation in recent months is casting a heavy shadow over economic policy plans on both sides of the Atlantic, as achieving the goal of consolidating the recovery now requires more subtle manipulations.

The impact is greatest in the US, where inflation jumped to 6.2% in October, the highest level since 1990, following high price increases in previous months. The US Federal Reserve (Fed) will begin phasing out its $ 120 billion-a-month bond-buying (QE) program in November, which began in March 2020 due to the coronavirus. In November and December, markets will shrink by $ 15 billion a month with the prospect of ending in 2022, most likely in the middle of the year. The Fed has kept interest rates at zero, and its chairman, Jerome Powell, has said it will not rush to raise them, although markets expect it to raise one or more of them next year. The Fed, like the European Central Bank (ECB), believes that inflation is largely due to temporary factors, such as supply chain disruption, which are likely to recede or disappear next year.

The spike in inflation has also alarmed the US government, with President Joe Biden urging the National Economic Council to take steps to reduce oil prices, which are also contributing significantly to inflation, and the Federal Commission. for Trade to control energy price manipulation efforts. The US government has released strategic oil stocks to boost supply and hold prices, with markets estimating the move will continue, although they believe it is of limited effectiveness. Biden continues his agenda to support development and social cohesion in the United States. After the passage of the bill for the modernization of the infrastructures in the country by the Congress, he continues the campaign to pass another important bill, amounting to almost 2 trillion. to strengthen social policy and tackle climate change. However, Republicans’ reaction to the bill intensified following the inflation data, and a Democratic senator voted in favor of postponing it for the same reason.

In Europe, the 4.1% rise in inflation in October is also a cause for concern. Bond purchases by the ECB are expected to continue after the end of the emergency pandemic program (PEPP) at the end of next March to consolidate the recovery, but some members of the Governing Council of the ECB, such as the Dutch and push to limit them to the lower levels of the Regular Program (APP) by the end of 2022. The views of these executives are in the minority, but they increase market uncertainty about what is to be born after March.

These decisions particularly concern Greece, as a special decision of the ECB will be needed to continue the Greek bond markets after March, as they are not eligible under the current APP regulation. It is noted that the President of the ECB, Christine Lagarde, had stated in September that the situation in Greece will be taken into account when decisions are made for the period after the end of the emergency program. As for the ECB’s key interest rate, which is zero, Lagarde stressed that it is unlikely to rise in 2022, but markets estimate that there will be one or two increases by the end of the year.

Inflation was also a major issue at the last Eurogroup and Ecofin meetings. Both institutions shared the view that inflation will begin to de-escalate in 2022, but will remain high for longer than previously expected. The position expressed is that inflation is an additional difficulty for growth but it will not be able to reverse its dynamics, thanks to the implementation of the Recovery Fund investments.

As for fiscal policy, which became particularly expansive during the pandemic period, it is expected to become much less expansive in 2022, with details to be known within the first quarter of the year when the EU will provide guidance. This was of course expected , as from 2023 the fiscal rules will come into force again, but the increase in inflation is another reason that leads in this direction.

The Eurogroup acknowledged the difficulty posed by external increases in energy costs, but left it to the discretion of countries to implement measures to support households and businesses based on European Commission directives.

Source: ΑΠΕ-ΜΠΕ

.

Source From: Capital

You may also like

Get the latest

Stay Informed: Get the Latest Updates and Insights

 

Most popular