Erste Asset Management

Despite high inflation, U.S. Treasury Secretary Yellen sees little risk of recession

Despite high inflation, U.S. Treasury Secretary Yellen sees little risk of recession
Despite high inflation, U.S. Treasury Secretary Yellen sees little risk of recession
(c) Federico Gambarini / dpa /
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US consumer sentiment recently fell to a record low owing to unusually high inflation driving prices. The index of consumer sentiment surveyed by the University of Michigan dropped surprisingly sharply by 8.2 points to 50.2 points compared to the previous month, the university reported on Friday after a first round of surveys, making this the lowest reading ever recorded. Analysts had expected only a mild average decline to 58.1 points. The US stock markets reacted to the figures with heavy losses at the end of the week, with the Dow Jones dropping by 2.7 per cent and US bonds also falling.

The University of Michigan indicator, a popular indicator on the financial markets, is a measure of the purchasing behavior of US consumers, and is based on a telephone survey of around 500 households. The survey asks respondents about the financial and economic situation and the corresponding expectations. According to the survey, both the assessment of the current situation and expectations for the future received low ratings this time.

Above all, high inflation, and here in particular the markedly higher petrol prices, are weighing on consumers’ expectations, said Joanne Hsu, head of the survey. Forty-six per cent of consumers surveyed attributed their negative view of the situation to inflation, with already-high inflation expectations increasing slightly. Consumers expect inflation to reach 5.4 per cent over the next year, up from the previous year’s expectation of 5.3 per cent.

Note: Representation of an index, no direct investment possible. Past performance is not a sufficient indicator of the future performance of the fund.

Inflation Rate Climbs to 40-Year High

Consumer price inflation data reported by the US Department of Labor on Friday reinforced this picture. After a slight decline in April, consumer price inflation accelerated again, reaching a 40-year high. In May, the year-on-year inflation rate was 8.6 per cent, the highest level since December of 1981.

Energy in particular was massively more expensive in the USA in May, increasing by 34.6 per cent, or more than a third, within the space of a year. Food prices also rose by an above-average 10.1 per cent, the biggest price increase since March of 1981. Globally, the war in Ukraine is currently reflected in rising prices for food and energy. In addition, there are ongoing supply chain problems, and in the US concerns are now also emerging about a possible wage-price spiral.

Gasoline Price Increases Are Becoming a Political Problem

In the US, high inflation has now also become a political problem for President Joe Biden. The price hike is currently having a massive impact at gas stations in particular. There, the price of a gallon of petrol (a little under 3.8 liters) has risen to over five dollars on average across the nation for the first time, according to data published on Saturday by the AAA automobile association.

Biden, responding to the inflation data, called it “Putin’s price hike” and said, “Even as we continue our work to defend freedom in Ukraine, we must do more—and quickly—to get prices down here in the United States. But it is also important that the oil and gas and refining industries in this country not use the challenge created by the war in Ukraine as a reason to make things worse for families with excessive profit taking or price hikes.”

Inflation Data Continue to Drive Rate Hike Fears

In US equity markets, the inflation data triggered sharp losses at the weekly close, as the data increase pressure on the Fed to raise its key interest rates further at its meeting this week to fight the inflation. Particularly the interest rate-sensitive technology stocks reacted accordingly with losses.

In view of high inflation, the Fed took the biggest interest rate step in 22 years in early May and raised the key interest rate by half a point to a new range of 0.75 to 1.0 per cent. Fed President Jerome Powell has signaled similar increases for both the June and July meetings, willing to accept that growth will be dampened by monetary tightening.

Us Treasury Secretary Yellen Says Recession Is Unlikely

However, rate hike expectations and record-low consumer sentiment are also fueling concerns about the economy. US consumer sentiment is of particular importance in the US economy, which is heavily dependent on domestic consumption, and is currently at low comparable to the recession in the early 1980s, according to the University of Michigan.

In the first quarter of the current year, the US economy shrank by 1.5 per cent on an annualized basis. However, US Treasury Secretary Janet Yellen believes a recession in the United States is unlikely. “I don’t think we’re going to have a recession,” Yellen said Thursday, ahead of the release of the latest data.

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Prognoses are no reliable indicator for future performance.


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