Interest rates are rising because inflation is very high there. Their IPCA closed February at 7.9% in 12 months. In the last three months, inflation has been running at 8.3%, already annualizing the rate. In other words, there is additional inflationary pressure.
The measures of inflation that are less sensitive to the various price shocks that have been occurring for at least seven quarters also indicate very strong inflation. These less shock-sensitive measures are called cores. The various cores have been running between 4.5% and 6.5%. When we consider the last three months, the numbers range from 6% to 7%, i.e. higher than the numbers in 12 months, which signals greater inflationary pressures ahead.
Services, excluding energy, run at 4.4% in 12 months, also above the 2% target.
The labor market numbers have surprised for the better. In the last 12 months, just under 7.5 million jobs were created. If the pace continues in the coming months, in eight months or so the labor market will be as tight as it was in February 2020, just before the coronavirus epidemic hit the United States. It was widely held that at that point there was full employment.
Other indicators show a tight labor market as well. For example, for every worker looking for a job, there are 1.7 job openings “looking” for a worker.
As Fed Chairman Jerome Powell has stated, “that is a very, very tight labor market at an unhealthy level.”
While it is true that inflation has risen due to an incredible set of supply shocks that have been hitting the United States -and also Brazil- for seven quarters, the diffusion of the inflationary process and the high core and service inflation, in association with the slack labor market, are signs that the inflationary process is acquiring some inertia.
Wages have been rising, although they still cannot keep up with inflation. Nevertheless, the best measure for wages, constructed by the Atlanta Fed, suggests that they are already rising at 6.5%, with a large acceleration at the margin.
A process of spiraling prices and wages is beginning, albeit slowly.
According to the projections of the Fed’s board, a soft landing scenario for inflation is still possible. That is, that the reversal of the shock and a slight rise in the interest rate to neutral will be enough to land the economy in 2024 with inflation on target, full employment and growth close to potential.
I think that the chances of a soft landing are slim. The inflationary process is showing signs of creating a life of its own.
Jerome Powell was asked, at the end of his press conference after the announcement of the decision by the monetary policy committee -Fomc-, if he thought that the Fed was behind in the monetary cycle. He answered that if he had known back then that things would go the way they did, interest rates would be much higher today.
I won’t be surprised if the pace of interest rate hikes in the United States accelerates.