In the West, the fight against inflation is the number 1 goal, because it seriously affects the quality of collective life. A complicated and deceptive struggle, because it is not so accurate to evaluate the information, nor the effects of the applied measures… that’s right, the economy is not so simple! We will take the case of the USA.

Phase 1. By the third quarter of 2021, demand, especially for consumption, rises dramatically and unexpectedly after vaccination, while supply cannot recover at the same rate. Basic economics tells us that this first generates price increases and later inflation (inflation is a generalized and sustained rise in prices). At this stage, the Federal Reserve (RF, US central bank) attaches little importance to the issue.

January started with a monthly inflation of 0.12% and a basic family basket of 764.71 dollars, reports INEC

Phase 2. The invasion of Ukraine deepens the phenomenon because it affects very specific and important markets such as oil, fertilizers, food. RF begins to observe the object.

Phase 3. Alarms go off when inflation peaks, surpasses 6%, something not seen in 40 years, and in April the RF counterattack begins with its basic tool: raising interest rates, which has the effect of less money in the economy and a brake on demand. In July, inflation exceeded 9%, panic. The growth of interest is even more drastic.

The best data on inflation suggest (…) that the RF will raise interest rates less in 2023.

The country where prices doubled every 15 hours

Phase 4. In the meantime, the value of stocks on the stock exchanges is falling (or is it crashing?). An inevitable effect because the value of the company is given by two factors: one, the future growth of its profits, linked to the growth of the economy; second, the interest rate, because when it goes up, the company is worth less in today’s dollars. Then expectations of lower growth and higher interest rates played against a market that was also inflated by a monetary bubble, just like houses that lost 5% of their value (almost 3 trillion).

Phase 5. In the last months of 2022, two possibly contradictory phenomena occur. Inflation is falling fast: especially monthly because annual inflation is slower, but it still falls to 6.5% in December, while the RF continues to drastically raise interest rates (45% that month). Contradictory? Not really. After months of slackness, the RF now wants to show itself that it will not stop in its fight.

Phase 6. The best inflation numbers lead analysts to believe that the RF will raise interest rates less in 2023. The result: stocks rebound, the S&P500 rises 10% in one month, and the dollar falls as its interest rate outlook becomes less attractive, reaching $1.10/euro (recently $0.95/euro) and 4,500 Colombian pesos per dollar (5,200 a few months ago).

Phase 6. The Russian Federation announces that it will continue with an aggressive interest rate policy, and to some extent it is right: the annual inflation in January fell a little, but the monthly inflation is quite bad: 0.5%. You always have to look at two measures, the annual and the monthly, and not the one that generates more pleasant news for you. The effect: shares fall 5% and the dollar is now at 1.05 to the euro and 4,900 to the Colombian peso.

Phase 7. Please see key inflations (annual and monthly) for February and March! (OR)