Expected Premium US April Consumer Prices 'Possibility of Giant Step'

April CPI Increase Rate 8.3%... Slowed for the First Time in 8 Months but Exceeded Expectations
Concerns Over Inflation Entrenchment... ECB Likely to Raise Key Interest Rate for the First Time in 11 Years

[Asia Economy Reporter Park Byung-hee] Concerns are growing that U.S. inflation may become entrenched as the U.S. Consumer Price Index (CPI) for April rose higher than expected. Accordingly, expectations have strengthened that the U.S. central bank, the Federal Reserve (Fed), may raise interest rates more aggressively. Analysts suggest that the possibility of choosing a so-called giant step, raising the benchmark interest rate by 0.75 percentage points at once, has also increased.

According to Bloomberg News on the 11th (local time), the U.S. Department of Labor announced that the Consumer Price Index (CPI) for April rose by 8.3%. Although this was a decrease from 8.5% in March, marking a slowdown in the inflation rate for the first time in eight months, it exceeded Wall Street's forecast of 8.1%. As a result, the outlook that the inflation rate would peak in April has become ambiguous.

Aneta Makowska and Thomas Simons, economists at investment bank Jefferies, analyzed the April CPI, stating, "There is no evidence that the inflation trend has peaked," and added, "The possibility of the Fed raising the benchmark interest rate by 0.75 percentage points remains valid."

Economist Simons particularly pointed out that "there is no sign that core inflation pressures, excluding energy and food prices, are continuously easing," noting that the month-over-month increase in core CPI for April was 0.6%, which is higher than March's 0.3%.

With expectations that the Fed will continue its aggressive interest rate hikes, the European Central Bank (ECB) is also increasingly likely to raise its benchmark interest rate at the monetary policy meeting on July 21, marking the first increase in 11 years.

This is because ECB President Christine Lagarde, who earlier this year was uncertain about raising rates within the year, hinted at a possible hike in July.

During her visit to Slovenia on the same day, President Lagarde said, "The ECB's asset expansion through bond purchases will stop in early Q3, and shortly thereafter, we expect to raise the benchmark interest rate." She added, "Shortly thereafter could mean a few weeks."

President Lagarde stated, "The end of net bond purchases and the interest rate hike will give households and businesses the expectation that prices will not rise further." She also emphasized that such tightening measures are important for the ECB's credibility, saying, "It shows the ECB's commitment to fulfilling its mandate of price stability."

If the ECB raises rates in July, it will be the first increase since July 2011, exactly 11 years ago. Unlike the ECB, the Fed already began raising rates in March for the first time in over three years and decided on a big step of raising rates by 0.5 percentage points at once earlier this month. As the Fed and ECB show different speeds in their tightening policies, the euro has weakened about 10% against the dollar over the past six months.

Vincent Mortier, Chief Investment Officer (CIO) of Amundi, Europe's largest asset management firm, predicted that parity of 1 euro = 1 dollar could occur within six months. Mortier CIO explained that the Fed and ECB have different focuses in their monetary policy operations, which is why the euro is expected to weaken against the dollar. He said the Fed centers its monetary policy on curbing inflation, while the ECB focuses on suppressing the rising borrowing costs of Eurozone member governments. Mortier CIO added that the ECB has no choice but to raise rates slowly to prevent the debt burden of vulnerable Eurozone countries from increasing, and thus the euro is expected to remain weak against the dollar in the future.

If the euro and dollar reach parity, it will be the first time in 20 years since 2002.

This content was produced with the assistance of AI translation services.