Inflation Outlook | Weekly Excerpt December 19
The Fed's report came out on Wednesday, raising its interest rate for the seventh time this year by 50 bps, rising to 4.5%. This is as expected and in the press conference following the report, Jerome Powell indicated that this is not the end of these hikes yet. He mentioned that, if necessary, they will continue to escalate until they have strong confirmation that inflation is slowing in a sustainable manner. In theory, though, we should have already lived through the largest BPS hike during this period.
In Europe, the same thing happened, raising the rate by 50 bps. In comparison to the US, the European central bank has opted for a smaller increase, raising it from 1.5% to 2%. Christine Lagarde made it clear that the rate hikes have not yet come to an end and a significant increase can be expected next year. She also said that from the beginning of March it would start reducing its balance sheet by 15 billion euros ($15.9 billion) per month on average until the end of the second quarter of 2023.
The case for pessimism begins with some indisputable data points. Thanks to inflation, the real purchasing power of Americans has been falling for more than a year. Add to this the factor that we are living with one of the oldest populations in the world, and there is a valid case for pessimism.
An aging population can be inflationary. More people retiring means fewer workers contributing to the supply of goods and services, but more consumers demanding them. However, this also reduces demand in certain sectors. Developed economies should find a way to support the high and growing demand for healthcare services with a productive age workforce. There is currently a shortage of doctors in many nations within the European Union.
The economy in a weak state
This gives us to understand that the economy is in a weak state and could possibly lead to a recession if we continue on the same path. In fact, most of the world's economies share the opinion that this recession is going to happen. Not to panic, they also stress that it will not be the worst recession we have ever or will ever experience. As the year draws to a close, the usual flow of economic sentiment is not in full swing.
