Dubai: Khansa Al Zubair
US markets have been bitter about this week’s June inflation report, but there are signs that they are betting the worst is over. Economist Paul Krugman says this theory is not wishful thinking, but a fact underpinned by two main reasons.
Indeed, many observers believe that inflation peaked in May when the CPI data recorded 8.6%. Despite this, the markets are now showing signs that they believe this too after the June report which showed prices rising by 9.1%; In an opinion piece published by the New York Times, Krugman pointed to the clear optimism in US government bond yields and specifically inflation-protected securities, which are showing signs that investors are expecting lower inflation.
He says the markets are likely looking at a lot of data that is not in the official reports yet such as numbers on energy and housing costs, both of which appear to be declining. On top of that, things like higher shipping costs and supply chain hurdles are also declining; Regardless of these factors, he believes that there are two clear reasons that lead investors to expect an improvement in the inflation picture in the near term and beyond:
First, wages did not rise in the way many feared it would; Wage inflation is among the most difficult types of inflation, but it is not out of control in this case; “The rate of growth in average wages was already slowing down from about 6% at the beginning of this year to about 4% now, and that is still a bit too high to match the Fed’s 2% inflation target,” Krugman wrote. not much”.
Second, the economist believes that it is too early to feel the effects of the Fed rate increases on inflation, and that no one can expect any impact in the three months since the central bank embarked on the rate-raising cycle. The Fed’s policy will lead to lower inflation, all of this will happen in the future. Markets, and so do I, think the Fed will contain inflation, but the June CPI somehow tells nothing about whether we are right. It is too early.”
On Thursday, Federal Reserve officials stated their support for a further 75 basis point rate hike at this month’s meeting, allaying some fears of a larger increase that traders believe is likely after the June CPI figures.
What we should fear now, says Krugman, is the fear itself, that is, that the Fed will allow it to be bullied into raising interest rates so much that it will produce an unwarranted recession.