US inflation lays the path for monetary policy

The analysts’ forecasts turned out to be right. The latest US inflation rate (8.3% in April, a 0.2% decrease from the previous month, which saw the highest rate recorded in four decades), has moderated slightly, which was projected by some experts, while coming as a surprise to doomsayers who expected prices to skyrocket across North America in the coming months. Even so, the Federal Reserve’s announced figure is still elevated, and will continue to be so until the fall at the very least, highlighting some of the (chiefly internal) factors that have been disrupting the markets and challenging economists.

Joe Biden recently stated that “inflation is a top domestic priority,” in response to the effects it has had on American families and businesses. Yet though the figure “will generate noise and volatility,” says Daniel Sancho, head of investments at MGP, this moderation could “give the Fed some breathing room.” Nevertheless, Alberto Matellán, Chief Economist at MAPFRE Inversión, clarified that what’s most important “isn’t the figure itself, but the long-term forecast.” The United States’ new monetary policy, designed to contain inflation, would consequently pave the way for future decisions both in Europe and in China:

• The Vice President of the ECB, Luis de Guindos, stated that price levels would remain at approximately 4.5% in 2022. Alberto Matellán believes that this projection is likely, given that “rates will stay high until summer but will begin to moderate in the fall due to technical factors.” However, Daniel Sancho thinks that the lack of clarity and heightened uncertainty “are bringing tight monetary policies into the equation, which are necessary for the European economy.”
• Meanwhile, the market consensus is that China, which relies on the US central bank’s policies (China’s liquidity is highly dependent on the Fed’s actions) will approve a new economic stimulus package to prevent growth from stalling. MAPFRE Inversión’s expert believes that, in this respect, the Asian giant’s monetary policies “aren’t necessary.” “Fiscal measures are what would be in their best interest, with less conventional stimulus that would benefit global growth,” he added.

Regardless of the decisions taken in coming months, the prospect of an economic recession is still looming. The steady growth that took place as the pandemic began to recede was interrupted by the unanticipated war in Ukraine. The economist believes that “although less growth is anticipated (an estimated 3.5% for Europe this year), it’s still positive.” He doesn’t rule out an eventual crisis which, if it occurs, would in part alleviate the pressure on prices for raw materials, especially oil (which is currently priced at over 100 dollars per barrel of Brent crude).

Without losing sight of the markets, Alberto Matellán recognizes that variable income “doesn’t have many reasons to celebrate this May,” mainly due to the current situation that investors find themselves in. “But these rough patches shouldn’t scare us. We need to focus less on the short term and pay more attention to long term investment,” clarified Daniel Sancho. MAPFRE Inversión’s expert thus adds that, when faced with downturns in the majority of asset classes, “we mustn’t focus only on high-risk assets, but instead maintain a diverse portfolio through active management.”