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Europe is beating inflation. Why can't America declare victory?

·2 mins


Inflation Comparison: US vs Europe #

Inflation rates in the United States and Europe have been the subject of recent discussion. While inflation has declined in both regions, progress appears to have stalled in the US compared to Europe. The US Federal Reserve is expected to start cutting interest rates after the European Central Bank. Annual US inflation stood at 2.7% in March, while the Consumer Price Index rose 3.5% during the same period. In contrast, annual consumer price inflation in the Eurozone slowed down to 2.4%. One reason for this transatlantic discrepancy is the difference in measures used to calculate inflation, particularly in relation to owner-occupiers’ housing costs. However, when using core inflation rates that exclude energy and food prices, the US and Europe show similar rates of inflation. The central banks in each region will base their monetary policy decisions on the measure of inflation they target and not on harmonized or adjusted measures. Additionally, the divergence between the US and Europe regarding economic growth plays a role. The US economy is projected to grow at a rate of 2.7% this year, while the eurozone expects a more modest 0.8% expansion. Factors such as robust consumer demand due to government support during the pandemic and a stronger labor market in the US contribute to the divergence in economic growth. On the other hand, Europe’s economy is impacted by the lingering effects of an energy crisis. High inflation rates in the eurozone resulted from a spike in natural gas prices following Russia’s invasion of Ukraine. The strength of the US economy increases the likelihood of sustained high inflation, leading to cautiousness from the US Federal Reserve in cutting interest rates compared to the European Central Bank. Both regions are facing labor shortages, prompting wage increases and inflation in the services sector. However, US consumer demand appears to be stronger, with a decreasing savings ratio indicating a willingness to spend.