California Observer

Powell Warns the US stock Markets of Inflation

Image Source: News Times

Following stern remarks made by the president of the US central bank, the Federal Reserve, stock markets in the US concluded the week substantially lower as inflation went significantly higher.

Jerome Powell, the bank’s chairman, declared that in order to prevent inflation from becoming a persistent feature of the US economy, the bank must keep raising interest rates. His statements caused US stocks to plunge, and markets fell by 3%. It occurs at a time when Americans are facing higher prices for necessities. Inflation in the biggest economy in the world is at a four-decade high.

The Federal Reserve will likely implement additional interest rate hikes in the upcoming months and may keep them high “for some time,” according to Powell, who gave a highly anticipated address at a conference in Wyoming on Friday.

At the Jackson Hole conference, he declared that “reducing inflation is likely to require a sustained period of below-trend growth.”

Investors fear that higher interest rates may increase the likelihood of a recession if economic growth slows.

Getting inflation under control would cost American firms and individuals money, Mr. Powell acknowledged, but he insisted that the sacrifice was justified.

Mr. Powell seeks to prevent inflation from becoming ingrained. To put it simply, this means that if individuals anticipate rising inflation, they will act in a manner consistent with that belief, creating a self-fulfilling prophecy. For instance, an individual who anticipates a 3% increase in prices is more likely to demand a 3% increase in pay.

When this occurred previously, Paul Volcker, Mr. Powell’s predecessor, had to slam on the breaks, substantially hiking interest rates and plunging the country into recession.

The Federal Reserve’s benchmark interest rate was almost zero in March, but it has since increased to a range of 2.25% to 2.5% to combat inflation.

Prices in the entire economy are rising more quickly than they have in the previous 40 years.

People’s budgets are being strained since their wages aren’t keeping up with the rise in living expenses.

How Inflation affects the everyday life

The rising cost of anything over time is referred to as inflation. The government produces a fresh estimate of the rate of inflation in nations like the US and the UK each month.

Multi-decade highs are being reported in many nations, including the US, where inflation touched 9.1% in June, the highest level since 1981.

The International Monetary Fund forecasts that inflation will be 9.5% in emerging markets and developing economies and 6.6% in advanced nations.

Read Also: US attempts to tame soaring prices with huge interest rate 

Since government expenditure, especially family assistance checks, kept demand exceptionally high in the US, the rise in inflation began during the pandemic. Many other sections of the world, including Europe, are affected by more recent problems, such as the conflict in Ukraine.

Even in nations like the US, where a tight labor market has forced employers to raise wages, pay increases haven’t kept up with costs.

In fact, after accounting for inflation, the average hourly salary in the US was 3.6% lower in June than it was in May. The cost of living issue in the UK is being caused by the fastest salary decline since 2001.

Increasing energy prices, material shortages, and the effects of COVID are all worldwide issues that contribute to the rising cost of living.

Countries with ties to Russia, such as Estonia and Lithuania, have recently been impacted particularly hard as a result of the conflict in Ukraine.

As in the UK, where a rise in the cap was responsible for over three-quarters of the increase in inflation in April, changes to energy price caps also impact rates.

Saudi Arabia, which produces oil, is among the nations with the lowest inflation rates, while Japan, which has historically had problems with inflation that was thought to be too low, has managed to maintain a pretty consistent level of inflation.

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