Qatar National Bank considered that it is too early to control the high inflation rates in the United States and European Union countries, despite the significant moderation of core inflation, expecting a change in the monetary policy of the European Central Bank and the Federal Reserve (US Central Bank).
The bank stated, in its weekly report, that core inflation is still not reassuringly high in a context in which labor markets are still tight, and wages are high, stressing that high inflation rates may moderate more in the coming months, but it will be difficult for the Board of Directors. The Federal Reserve and the European Central Bank return inflation rates to levels below the 2 percent target, without keeping interest rates high for any longer.
The report added that there are two main factors related to inflationary pressures resulting from energy prices and the tightening labor market conditions in the United States and the eurozone. It has come to an end, as the price of Brent oil peaked at around $124 per barrel in June last year, and averaged $73.4 in March 2023.
He pointed out that the decline in energy prices had a significant impact on overall inflation when inflation levels rose in 2022, as energy costs contributed by 3 and 4.3 percentage points to the main inflation of the United States and the euro area, respectively, but oil prices rose recently after the sudden announcement. By members of the “OPEC Plus” coalition, it announced a reduction in oil production by 1.15 million barrels per day.
And the bank believed that despite the prevailing belief in the market that the recovery of economic activity in China is less strong than expected, expectations indicate more recovery, which will enhance demand and provide more support for higher energy prices in the medium term, and thus lead to the emergence of Inflationary pressures in the future as a result of high energy prices.
Qatar National Bank added that the second factor related to inflationary pressures is that basic measures of inflation exclude volatile items such as food and energy, which indicates that basic price pressures are still strong despite the standard measures to tighten monetary policy implemented by the European Central Bank and the Federal Reserve. , noting that one of the main drivers of non-energy inflation is tight labor markets that continue to put pressure on labor costs, which is an indirect, but important factor affecting all non-energy price components.
He pointed out that the rise in wage levels in the United States and European Union countries as a result of low unemployment will increase costs, and thus pressure on inflation in the future, especially in the labor-intensive services sector, where companies raise prices to reduce pressure on their profit margins as non-related inflation has decreased. In the United States, energy rose to 5.5 percent last March, which means a decrease of only 0.6 percentage points since June, and it is still far from the target rate of 2 percent, in addition to that non-energy inflation in the euro area is rising, reaching 7.1 percent. last March.
The report concluded that core inflation developments are particularly important because monetary policy has little effect on commodity prices. In addition, central banks would like to see clearer signals that raising interest rates has a meaningful effect on the fundamentals of inflation to guide their future decisions.
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