The inflation situation in the United States appears to be stabilizing. For example, food prices remained stable in April, although food inflation rose 2.2% from last year.
However, Fed members remain cautious in predicting changes in monetary policy. Minneapolis Fed President Neel Kashkari emphasized the need for the regulator to wait for substantial progress in inflation before thinking about cutting rates.
He also suggested that the central bank might even consider raising rates if inflation does not come down. It is worth mentioning that the minutes of the last FOMC meeting did not show any change towards a more lax stance either.
Why the pessimism and doubts?
There are three main reasons. First, the U.S. economy remains incredibly resilient, with a strong labor market and stable consumer demand. This resilience makes it difficult to control inflation.
The second factor is geopolitics. New tensions in the Red Sea and supply chain disruptions are driving up logistics costs. With the peak shipping season underway, container shipping rates have risen by more than 30% in recent weeks.
Shipping companies are forced to seek alternative routes, leading to delays and further price increases. Additionally, the instability in the region could affect oil supply in the short term, further increasing logistics costs and potentially forcing the Federal Reserve to postpone cutting interest rates. The US dollar index has also reversed its trend since the start of the year.
Finally, natural disasters are also contributing. Dry weather in Russia, the world's largest wheat exporter, has reduced export forecasts and pushed wheat prices near their annual high after six months of calm.
In Australia, a summer drought affected the crop, although subsequent rains helped stabilize the situation. In Western Europe, a wet spring has affected winter crop quality in the UK, Germany, and France.
What next?
It is premature to sound the alarm bells and predict a significant spike in inflation in the coming months. For example, cocoa bean prices have been high for some time without causing widespread problems.
The same is true of the rise in robusta coffee futures. Although some commodities may experience price spikes, this does not spell disaster for the overall economic outlook.
However, demand for bonds among investors is growing due to the Fed's tough stance and investment houses' predictions that rates will not fall until September.
To assess the extent to which this is realistic, we must examine the macroeconomic data, which do not support an early review of monetary policy at the moment.
US business activity has accelerated sharply, reaching its fastest pace in more than two years. This suggests the Fed's 2% inflation target remains out of reach.
And the markets?
Despite the uncertain outlook for rate cuts, optimism persists. Investors believe the economy will withstand despite the Fed's tough stance. However, only time will tell whether this optimism is justified.