No interest rate hike
The Federal Open Market Committee (FOMC) statement on Wednesday will dominate the news this week. I remain in the camp that the Fed should not increase key interest rates further due to the fact that owner’s equivalent rent in the Consumer Price Index (CPI) and wholesale service costs in the Producer Price Index (PPI) rose only 0.3% and 0.2%, respectively, in August.
The primary reason that the CPI and PPI rose in August was due to gasoline price increases of 10.5% and 20%, respectively. There is nothing that the Fed can do about high food or energy inflation, so I expect that the core rate of inflation will continue to moderate.
The European Central Bank (ECB) recently raised its key interest rate 0.25% to 4%, which is the highest level ever. The ECB signaled that the fight against inflation is more important than stimulating economic growth. Italy and Germany are big export economies and due to China’s economic woes, they are contracting this quarter and will likely drag the entire eurozone into a recession.
Inflation in the eurozone has dropped dramatically from a peak of 10.6% last year to 5.3% in August. Food and energy inflation in the eurozone is much more acute than in the U.S., but there is little that central banks can do to combat food and energy inflation, so I think the ECB may have made a mistake with its latest key interest rate increase.
