The Cost of Reducing Inflation
It is becoming increasingly clear that the process of reducing inflation in the world will be long and costly, with risks of recession in the United States and Brazil. In the USA, the latest data indicate that the 12-month rate of the Personal Consumption Expenditures Price Index (PCE) has started to accelerate again, while the unemployment rate is still falling and economic activity is expanding.
The minutes of the most recent FOMC meeting clearly indicate that the Fed’s tightening policy will continue, and the probit model available at the website of the NY Fed estimates that the likelihood of recession is greater than 50%. In the Euro Zone, the mild winter has allowed maintaining comfortable stocks of gas, whose prices have fallen substantially, favoring growth of economic activity. The PMIs are again in expansion territory, but the ECB has signaled continuity of its tightening cycle seeking to reduce inflation. In Brazil, without the tax breaks on fuel, inflation would have closed 2022 at around 9%.
Although monetary policy is strongly restrictive, expectations for 2023 and 2024 continue to stray from the respective targets. The timid fiscal package of Haddad, with the objective of eliminating the primary deficit contained in the budget, falls far short of indicating an end to the fiscal-monetary conflict. This coming week will see publication of the official GDP figures for the last quarter of 2022, but both the IBC-Br and the GDP monitor from FGV indicate a decrease, while the confidence indicators point to further decline in the first quarter this year. Based on fear that the government will react to these signs by expanding credit via public banks, with the Treasury bearing the brunt, the yield curve continues to reflect a large risk premium.
Now read on...
Register to sample a report