The worsening of inflation is global and has already mobilized a review of the conduct of several central banks. In reaction to the escalation of consumer prices, which threatens to contaminate long term expectations, the US Federal Reserve indicated that it will be less patient.
Besides anticipating the end of its interventions in the public bond market, now expected in March, the Fed has projected a hike in the basic interest rate of 1.5 percentage points until the end of 2023 – with half of this distance to be covered next year.
By the standards of the central bank that issues the world’s main currency, which underpins about 70% of commercial transactions, this is a substantial change.
It is too soon to say that the United States is facing a scenario of persistent inflation. Families and companies, accustomed to stability, tend not to incorporate occasional jumps in prices in their long-term calculations. Nor do automatic indexing mechanisms exist in the country.
Even so, the situation is worrying. The rate for consumers reached 6.8% in the 12-month period ended in November, the highest level in decades.
Most of the pressure is concentrated in durable goods and items like food and energy, whose demand was boosted by the pandemic. The phenomenon should cool, but uncertainties remain.
The risk is that inflation will prove to be more lasting, which could alter the behavior of the private sector. With the economy almost back to full employment and changes underway in the labor market, it seems possible that wages will rise more.
The better performance of income would doubtless be good news in view of the current picture of high social inequality, but for the Federal Reserve, it could mean greater difficulty in maintaining the variation of prices around the target, fixed at 2% per annum.
The good news is that for now the financial markets still do not foresee that the institution will have to raise interest rates above 2.5% a year at the end of the cycle. Given the risks, however, the central bank decided to take back the reins, considering that adopting measures earlier reduces the probability of being forced to do more later on.
Many of the doubts should be cleared up in 2022, which promises to be more difficult for markets accustomed to stimuli that are now beginning to be reversed.