While inflation has decreased from record highs on both sides of the Atlantic, progress towards controlling it has stalled in the United States as the Federal Reserve now anticipates interest rate cuts to occur later than its European counterpart’s expected moves. The Fed’s preferred gauge for measuring US inflation, known as Personal Consumption Expenditures (PCE), rose by 2.7% annually in March compared to February’s figure of 2.5%. Meanwhile, the Consumer Price Index (CPI) showed a similar upward trend with an annual increase of 3.5% in March versus last year’s mark of 3.2%, signaling sustained price rises in both economies.
However, among the twenty countries that use the euro as their currency, inflation has steadily declined since January, currently standing at a rate of 2.4%. This trend is expected to prompt the European Central Bank (ECB) to begin cutting interest rates three months before the Federal Reserve does so based on market predictions. Even hints have been dropped by Fed Governor Michelle Bowman that she would support an increase in borrowing costs, stating: “Should progress on inflation stall or even reverse…”
Several economists asserted there are minimal discrepancies between US and European inflation levels, emphasising the way in which homeownership prices figure into US figures. While owner-occupier housing expenditures account for a sizable percentage of both US price indexes — notably CPI (32%) greater than that provided to it under PCE measures(13%)– none are apportioned an amount towards hypothetical homeowner costs in the eurozone’s primary measure. This disparity exaggerates recent variations between US and European inflation, according to Simon MacAdam of Capital Economics, who suggests when accounting for alternative measures that remove these estimated housing expenditures; core prices have remained very comparable on both sides of the Atlantic during the previous six months.”The United States doesn’t face a fundamental problem with broad-based excessive price pressures in contrast to some recent commentary,” he wrote.
Despite this, US and European central banks are looking at different times for interest rate cuts due to disparities between economic growth levels on both sides of the Atlantic. The International Monetary Fund predicts that the United States economy will expand by 2.7% in 2023 compared to an estimated gain of just 0.8 percent throughout Europe during the same time frame, with US employers adding a record-breaking number of jobs (303,000) in March alone and government spending being notably higher than that seen across European states for COVID recovery programmes during the last several years resulting from continuing strength which keeps consumer demand particularly robust.
Europe’s economy is weaker due to lingering effects brought about by an energy crisis triggered when Russia cut off gas supplies, causing prices in Europe to skyrocket to all-time highs. The eurozone experienced a peak inflation rate of 10.6% and the United States saw its highest annualised level at 7.1%, respectively recorded for both indices during last year’s events.
The strength of the US economy makes it more likely that price increases will continue to escalate, which is causing hesitation on behalf of Fed officials regarding cutting interest rates in July when compared with European Central Bank plans, according to Carsten Brzeski, global head of macroeconomic research at ING who notes labour shortages across both regions forcing businesses to increase salaries and boost inflation for services sectors. US households’ savings ratio is also decreasing as consumers become more willing to spend their money again whereas European households are generally more cautious with their finances in light of ongoing economic uncertainties, he added.
Davide Oneglia, director of European and global macroeconomics at TS Lombard concurred, asserting: “The US consumer is considerably eager to spend due possibly better prospects for themselves in the labour market.”
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