Economy in Brief: 2022

Inflation in the European Monetary Union (EMU) rose by 0.7% in February after rising by 1.1% in January. The core measure for inflation (excluding food and energy) in February rose by just 0.1%; that was after rising by 0.7% in January. Sequential growth rates that measure inflation over 12 months, six months and three months show inflation has been building momentum for the headline inflation rate which expanded by 5.8% over 12 months, at a 7.9% annual rate over six months and at an 8.9% annual rate over three months.

The core rate of Inflation breaks this string of acceleration but only technically. The 12-month core gain is at 2.6%; that rises to a 3.9% annual rate over six months and that in turn backs off very slightly to log a technically smaller gain at a pace of 3.8% over three months. Essentially inflation has gone from being excessive over 12 months to being much more excessive over three months and six months according to each of these measures.

The ECB is well away from its target of hitting 2% inflation although as we're going to see in the averages for inflation how much better-behaved much of this inflation phenomenon is when averaged. Inflation has really welled up relatively recently although it's quite excessive and now it still has momentum.

Moreover, inflation is gaining momentum and from different sources. Oil prices are still extremely high in February. But Brent oil prices measured in euros fell 28.2% in February after rising by 14% in January. Oil prices remain high and the impact on inflation is still something to worry about because in global markets oil continues to hover at very high levels. Also, Europe has an economic 'IV' line for energy that is piped in from Russia making it dependent on the very country on which they have slapped aggressive economic sanctions. And to follow that thought… since Russia is walled off from global markets by sanctions, at some point it may find oil revenues as not as valuable as cutting off the oil flow and inflicting economic pain on Europe.

In several ways the war in Ukraine is a factor...

Before the war welled up, there were supply chain problems created by the pandemic (remember the pandemic?) and these supply chain issues were affecting prices globally, creating shortages, creating price pressures, and that now is made worse by having a war in Ukraine and having these countervailing sanctions placed on Russia.

Russia is rich in natural resources and with the West putting sanctions on Russia, Russian commodities are going to be unavailable to the world and this is going to be reflected in higher commodity prices. The invasion of Ukraine is taking Ukraine off the map as an international trading partner and that of course is going to hit the food market and wheat market particularly hard as well as the market for selected natural resources. The implication here is that inflation is high, inflation has momentum, and inflation has some new sources that are going to make it worse before things get better.

At today's meeting of the Federal Open Market Committee (FOMC), the Fed announced that it will raise the target for the Federal funds rate to a range of 0.25% - 0.50% from 0.0% - 0.25%. The current rate has been in place since March 2020.

The Fed indicated that "the invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

It also stated, "With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong."

The statement issued following today's meeting can be found here.