Inflation rebound in US deepens monetary policy divide with Europe

Recent US Department of Labor data show that the consumer price index in the United States rose 3.5 percent yearon-year in March, up 0.3 percentage points from the growth in February, and the core CPI rose 3.8 percent yearon-year and 0.4 percent month-onmonth, both exceeding expectations for three consecutive months.

The higher-than-expected CPI indicates that the rebound in the US inflation since the beginning of the year is not temporary. The minutes of the US Federal Reserve’s monetary policy meeting in March also show that the Fed will not cut interest rates until it is confident inflation is steadily returning to the target level.

Analysts point out that the continued rebound in US inflation has had many impacts on the US and global markets. With inflation data rebounding, market institutions have to reassess the Fed’s policy path, with Wall Street traders expecting the Fed to keep rates higher for longer. There is speculation that the Fed may raise rates again.

Jamie Dimon, chairman and CEO of J.P. Morgan Chase, even said “we are ready for the Fed to raise interest rates to as high as 8 percent”.

After the March inflation data were released, US President Joe Biden broke the practice of not commenting on the Fed’s decision, saying he believed the Fed will cut rates by the end of the year. Analysts believe that Biden’s remarks reflect that the US economy is unable to withstand continued high interest rates, and the “resilience” of the US economy may not be as strong as claimed by the Fed.

As expectations of US interest rate cuts subside, the divergence between European and US monetary policy will widen. If the European Central Bank cuts interest rates before the Fed does, it could cause the euro to fall sharply and European enterprises to pay more for dollar-denominated imports, which would fuel inflation again.

The ECB has intensified efforts to shed the impression that it follows the US in terms of monetary policy. Therefore, it is believed the ECB, fearing that the economy could lose steam, may cut interest rates before the Fed does in June.

The US inflation data are an important indicator of the country’s and even global economic trends. However, there have been more signs that inflation data have gradually been used by the US government and the Fed to influence market expectations. The question is, as US federal government debt approaches $35 trillion, how long can this tool be wielded?