Emerging Stagnant-inflation in the Eurozone/EU & USA

Inflation begins to make a threatening appearance in the EU and US since last summer due to a combination of dynamic economic recovery in COVID-19 conditions, serious problems in international trade and supply chains and upward trend in international oil and mainly gas prices.

Inflation had reached high levels before the Russian invasion of Ukraine. However, it acted as a catalyst to increase the intensity and increase the duration of inflationary phenomena.

Eurozone/EU

The invasion of Ukraine and the ensuing sanctions could cost Russia 8% -10% of its GDP. Ukraine is economically devastated if it is faced with a drop in GDP of 40% -50%. However, the consequences are also important for the EU.

Trust Economics (https://trusteconomics.eu) and international organizations show estimates for economic growth in the EU be problematic, while the warnings for emerging stagflation have been intensified lately.

The European Central Bank (ECB) is called upon to make difficult decisions on gradually raising interest rates to help control inflation, but without leading the eurozone into recession. The President of the ECB, Ms. Lagarde, and her staff underestimated the inflation risk. They are now under a lot of pressure to adopt a relatively strict monetary policy, but stress that over-rigor – by the German or Dutch central banks – could lead the European economy into trouble.

Annual inflation is boosted by the 172% increase in the price of natural gas over the twelve months and by the strategic mistake of the large percentage of electricity generation, 45% -50%, based on natural gas (for more information-forecasts regarding the cost of oil until the end of 2022 and for 2023, please read the analysis entitled “High probability the Price of Brent to Remain over $115 by the End of 2022“).

EU member-countries with high public debt, competitiveness problems and/or budget deficits such as Greece and Italy are already experiencing a large widening of their trade deficit, which is partly due to their traditional dependence on imported fuels – which have become much more expensive – but also to increase in the trade deficit – excluding petroleum products – due to the general problem of international competitiveness of their economies.

The interest rate on the 10-year Greek government bond jumped over 4%, sending a message that we are reaching the end of the period of low interest rates. However, with harmonized inflation above 10%, the real borrowing rate of the Greek State is impressively negative.

The President of the ECB Christine Lagarde underlines that it will not leave Greece and especially Italy helpless, while the European institutions support the continuation of the relaxed implementation of the Stability Pact. But there is no doubt that the war in Ukraine will have serious consequences for the European economy, especially for economies such as Greece with serious structural problems.

USA

The US Consumer Price Index last week rose to 8.6% (IMF), climbing to a 40-year high. Real, not nominal, inflation is double, at least. When the CPI reached a 40-year high, markets plunged and continued to sink in the following days.

The new levels of the CPI in the US show that the FED has a long way to go to overcome the rate of inflation, to bring about a balance in the real interest rate, which according to Trust Economics is moving at the levels close to 16%.

In a relatively similar period, 1979-1980, when the FED was again experiencing record inflation of 14.8% (March, 1980), FED Funds’ interest rates jumped to 20% to balance the then current real interest rate. Today, the FED Funds interest rate is 1.5%, which does not correspond to reality. Possible reasons for hiding the truth are, because such an increase in interest rates would cause a collapse in the stock markets, while causing a frighteningly large political and social problem respectively.

All these measurements confirm the nightmare scenario of the central bankers and what the western economies and societies are going to face: stagnant inflation.

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TRUST ECONOMICS

Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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