May 29, 2024
World Economy

Floods, war and US inflation crash the IMF party – POLITICO

Yet the same Ver.di was only last week proudly telling its members that it had secured a pay rise worth up to 18 percent over two years for its members at German airline Lufthansa, a powerful illustration of how wages are ‘catching up’ with past inflation and becoming more of a supportive factor. The expected increase in real incomes is one of the key reasons why the ECB expects the recovery to gain momentum over the next year.

Moreover, cutting rates while the Fed is talking about raising them is likely to push the euro lower, creating the optics of actively trying to steal a competitive advantage against U.S. companies. And that could provoke a reponse of import tariffs from a re-elected Donald Trump, or even from an incumbent president Joe Biden, in an effort not to be outflanked running up to the vote in November.

So what happens after June is anyone’s guess. The ECB expects inflation to be bumpy for the rest of the year, after hitting a two-and-a-half-year low in March. It is acutely sensitive to the optics of cutting rates if headline inflation is not actually falling any longer. 

As BNP Paribas chief economist Marcelo Carvalho told POLITICO on the sidelines of the meetings, growth is resilient, inflation is  sticky, and so policy is likely to stay cautious.  As many have observed in recent weeks, “the last mile is the hardest” when it comes to ending a three-year inflation episode that has upended the lives of millions. 

On the brighter side, Carvalho argued that the eurozone, which has barely grown for the last six quarters, will return to its long-term trend, while the U.S. will not keep up its current pace. That will end the “divergence” between the two blocs that has been the talk of Washington this week. The ECB may still envy the faster growth across the Atlantic, but at least as far as inflation is concerned, Carvalho noted: “The last kilometer is shorter than the last mile.”

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