The Endless Struggle of Central Banks and Inflation

The majority of Central Banks around the world have maintained an unchanged inflation target for at least the past 50 years. Most of them have a 2% to 3% inflation target, no more than that. Working within a band of 1-3% inflation is a healthy way for the economy to continue growing. Too little inflation is not good either; it’s like medicine—you need the right dosage. Otherwise, it can either kill the patient or have no effect. That’s an easy way to understand inflation.

Now, with the “2% Inflation Target” speech, let’s take the USA as our model today. While the CPI over there is around the 3%-mark, inflation is much higher in many basic items necessary for daily life. Consider some of these items:

1. Rent Inflation = 5.4%
2. Homeowner Inflation = 5.8%
3. Car Insurance Inflation = 22.6%
4. Car Repair Inflation = 7.6%
5. Transportation Inflation = 11.2%

Keep in mind, inflation has been above 3% for over THREE years now.

1. The US Producer Price Index for Cement & Concrete Product Manufacturing rose to 247.8% from last month's 247.5%.

Producer Pirce Index USA 

So, consider these three years now as central banks around the world battle for inflation to come down. It looks like this battle is turning into a war of central banks and uncontrolled inflation. Just so you know, electricity inflation has reached its highest point in 40 years! Treasury yields could jump if U.S. Services Inflation data trends higher, and wholesale inflation is surging again.

Inflation Screener G10

Household debt levels in the U.S. increased in the first quarter of 2024, creating new challenges for already stressed credit card borrowers. Overall debt levels rose by $184 billion, or 1.1%, in the first quarter to a total of $17.69 trillion. Overall borrowing levels are $3.5 trillion higher than they were at the end of 2019 prior to the onset of the COVID pandemic. These are not numbers from my head or something I'm making up. This data is taken directly from the Federal Reserve Bank of New York. You can access the report at this link.

Debt Levels are Rising as No Before

Now let’s talk again about interest rates. There are lots and lots of rumours about a cut from the FED this year. Some market participants think about a cut right in June. That’s not what Lawrence H. Summers, a former US Treasury Secretary, says in an interview with Bloomberg, where he mentioned that a cut in June would be dangerous. You can watch the interview at this

Federal Reserve Chair Jerome Powell said the US central bank needs to be patient as it awaits more evidence that high interest rates are curbing inflation, doubling down on the need to keep borrowing costs elevated for longer. (https://www.businesstimes.com.sg/international/global/powell-reiterates-fed-likely-keep-rates-higher-longer)

Trevor Greetham, head of multi-asset at Royal London Asset Management, discusses the outlook for inflation, the economy, and interest rates. “Hikes are definitely possible if the economy stabilizes from here and production picks up.” (https://www.bloomberg.com/news/videos/2024-05-13/interest-rate-hikes-are-possible-rlam-s-greetham-says-video)

Now we come to the end of this research. If you liked the content and want to know when the central bank will cut the rates, join my Telegram group where I will be discussing it. If you are not there yet, here is the link for you to join: Telegram Group.

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