Omicron optimism and low unemployment allow US to start fighting inflation

With the United States economy growing and the number of new applications for unemployment benefits at a 52 years low, but with inflation rising to a 40 years high, markets are expecting the US Federal Reserve to confirm its new anti-inflationary focus during its Wednesday meeting.

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

And as more healthcare specialists say that the Omicron variant looks less deadly, all elements are pointing to the continuation of the hawkish stance shown by Jerome Powell, Fed Chair at the end of November. This might read as an acceleration of the tapering and a possible outlook of an upcoming hike in interest rates. In Europe, however, the situation is different.

For the first time in the last seven months, Romania showed a marginally decreasing inflation for November 2021, reaching 7.8% from 7.94% a month before. Still higher than the average EU value, Romanian inflation seems to calm a bit due to the political decisions to cap energy prices. Following this, the largest decrease in prices was seen in electrical power with a 12.2% decrease compared with the previous month. We have also seen a decrease in prices for the non-food goods compared with October 2021. Food prices continued their increase with an average of 0.73% but the star of this month is corn flour that increased 5.47% followed by sugar with almost 5%, compared with previous month. In October 2021 the real salary gain was 98.2% compared with the same month last year. This means that despite the year on year salary increases of 6% the inflation reduced the purchasing power of the Romania employees.

While markets are looking at the US Fed tapering and interest rates increase prospects for next year, Christine Lagarde, European Central Bank President, was saying that “conditions to raise rates are very unlikely to be satisfied” in 2022. Unemployment rate in the European Union at 6.7% with Romania at 5.3% and EU inflation at 4.4% the situation is different from the United States, at least for now.

On the pandemic front, more and more reports of Omicron infections emerge daily but with these it looks that the light at the end of the pandemic tunnel starts to shine brighter. Health professionals are looking at the results of these infections and the data so far shows that the Omicron variant is more transmissible, but less lethal. The number of cases outside Africa is still relatively small so a certainty does not exist yet on how it will affect vaccinated but older populations in Europe and North America.

Meanwhile, the inflation rate in the US reached 6.8% in November with energy and used cars leading the price increases. So far this year gasoline and fuel oil prices increased close to 60% amid worldwide hikes in energy prices. Supply chain problems continue to cause price increases as well – used cars prices rose 31% due to the automotive chip crisis that resulted in lower new cars production and increased delivery times. Food prices have increased 6.1% in the past 12 months. While high, the markets were relieved that the inflation did not exceeded analysts expectations

While the US economy is growing, the workforce is getting more expensive and scarce and the recent decrease in unemployment applications is pointing toward a prolongation of the talent crisis. Companies are reluctant to fire employees fearing that they will not find new hires. Exceptions exist though, like the digital mortgage firm Better.com, whose CEO, Vishal Garg, fired 900 people in a single Zoom meeting. Garg briefly said to them that if they are in this Zoom call they are fired effective immediately. Few days after this story emerged, the press reported that the company’s board sent an email stating that after “the very regrettable events over the last week,” CEO Vishal Garg will be taking time off “effective immediately,” and Better CFO Kevin Ryan will manage day-to-day operations.

But this is only an exception. The number of US vacancies increased in October 2021 to almost 11.5 millions very close to the historical maximum registered in July this year.

All these elements, economic growth, low unemployment and high inflation, plus the information about a less deadly virus are hinting to a possible acceleration of the tapering with the markets very attentive to any discussion about increase in interest rates. For the Fed meeting this Wednesday the Fedwatch sees only a 2.2% probability of a rate hike but this is increasing to over 60% for the meeting in May next year.

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