Published on Monday, July 25, 2022

Global | A tale of two inflations

Inflation continues to rise on both sides of the Atlantic, albeit at a different pace, reaching around 9% year-on-year in June in both economies. However, economic activity and inflation are being affected by shocks waves that are hitting them unevenly.

Key points

  • Key points:
  • According to BBVA Research's estimates, the rise in inflation in the US is partly due to supply-side factors, but chiefly to domestic ones related to the strong recovery of demand and the tightening of the labor market in the wake of the drop in the labour force.
  • This came in tandem with an extraordinarily accommodative monetary policy as early as 2021, given the cyclical position of the economy.
  • Europe, where the rise in inflation is mainly due to foreign supply shocks, with sharp rises in the prices of imports, is highly vulnerable to the Russian invasion of Ukraine and the lockdowns in China, and the depreciation of the euro is exacerbating the situation.
  • The US Federal Reserve will keep tightening monetary policy (4% in the first quarter of 2023), and is willing to do whatever is necessary in terms of economic activity and employment.
  • The European Central Bank will also raise interest rates (to 2% by mid-2023), but its task is more challenging given that it is less effective in countering supply shocks and will simultaneously have to prevent the fragmentation of the financial markets.

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