U.S. inflation accelerates to a 40-year high, putting more pressure on the Fed and the White House:
The U.S. inflation rate hit a 40-year high in May. Driven by a general rise in prices, inflation accelerated unexpectedly, putting pressure on the Federal Reserve to raise interest rates aggressively for a longer period of time, and posing more serious political problems for the White House and Democrats. Data released by the U.S. Labor Department on Friday showed the consumer price index rose 8.6 percent in May from a year earlier. The widely watched inflation measure rose 1% month-on-month, beating all expectations. Housing, food and gasoline were the biggest drivers. The so-called core CPI, which excludes volatile food and energy, rose 0.6% month-on-month and 6% year-on-year, also above expectations. The figures dashed hopes that inflation had peaked and started to slide slightly. Record gasoline prices, coupled with rising food and housing costs, are putting enormous pressure on the cost of living for Americans, suggesting the Federal Reserve must hit the brakes harder on the economy. That would increase the risk of a recession, which some economists already expect could happen next year.
ECB official Kazaks said inflation was extremely high, unacceptably high:
ECB Governing Council member Martins Kazaks said inflation was too high and monetary policy action to address it was justified. “Inflation levels are extremely high, unacceptably high,” Kazaks, the hawkish Latvian central bank governor, told a group meeting in Poland on Friday. The economy will still need help, but it will have to be done increasingly through government spending rather than central bank stimulus, Kazaks said. Fiscal policy should remain "supportive" and "monetary policy is not the only tool, nor should it be the only tool," Kazaks said
UK two-year bond yields top 2% for the first time since 2008:
British government bonds tumbled, with two-year yields above 2 percent for the first time in more than a decade, as traders braced for further rate hikes by the Bank of England. Two-year British government bond yields rose 17 basis points to 2.03% on Friday, the highest level since 2008. U.S. inflation accelerated further than expected, with shorter-term bonds leading the sell-off in global fixed-income assets. The Bank of England is due to meet next week, and money markets expect the central bank to continue raising interest rates from the current 1% to around 3% in the first quarter of next year.
Russia lowered interest rates to pre-Russian-Ukrainian levels and will consider the need for further rate cuts later:
Russia's central bank cut interest rates to pre-Russian-Ukrainian war levels, while the ruble remains under pressure to appreciate and the economy is still reeling from sanctions. Russia's central bank cut interest rates sharply at an extraordinary meeting two weeks ago, and the central bank cut rates again at a policy meeting on Friday, cutting the benchmark rate to 9.5% from 11%. Most of the 23 economists polled by Bloomberg expected a smaller rate cut of 100 basis points. The Bank of Russia said in a statement that it "will consider the need for rate cuts at the next few policy meetings." The Bank of Russia also said that "the rate of decline in inflation accelerated and economic activity contracted less than the Bank of Russia expected in April," but noted that "the external environment for the Russian economy remains challenging, severely restricting economic activity."
Goldman Sachs: Energy prices not rising enough to curb demand:
Goldman Sachs said energy prices would need to climb further before Americans start cutting back on consumption. “Prices are not high enough to dampen demand growth,” Damien Courvalin, head of energy research and commodities strategist at Goldman Sachs, said in an interview on Bloomberg Television on Friday. Oil prices have surged more than 60% this year as Russia invades Ukraine, with West Texas Intermediate futures at around $120 a barrel. Tight supplies have pushed auto fuel prices to record levels, with the national average for gasoline approaching $5 a gallon and diesel at $5.753 a gallon, according to the American Automobile Association. Oil demand is growing given that global economic growth remains strong, Courvalin added. And so far, the momentum has shown that consumers are "still more resilient enough to absorb higher oil prices." U.S. gasoline demand rose to its highest level this year despite record oil prices, according to the latest data from the U.S. Energy Information Administration. Even so, demand was down about 1% from a year earlier and nearly 6% from the same period in 2019.
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