The fine line between growth and controlling inflation

There is no doubt that today central banks, particularly the United States Federal Reserve, are at the difficult crossroads of deciding how much they are going to increase their reference rates in order to control inflation, knowing that if the rise is strong, it could slow down the economic growth of their respective countries

There is a very fine line between being able to control inflation and continue to grow, or falling into a recession with inflationary pressures.

As we have commented on several occasions in this space, the central banks applied the same medicine to the crisis generated by the pandemic that began in 2020, as to the one we experienced in the financial markets in 2008: establish a lax monetary policy, which which in human language means injecting huge amounts of liquidity into the markets by maintaining extremely low reference rates, where in some cases they were at levels below zero, and by buying assets, bonds and other debt instruments, with The objective was for people to use those resources to consume products that would allow the economy to be reactivated.

The foregoing generated enormous liquidity in the markets that allowed investment funds or Hedge Funds to have significant amounts of money at their disposal to invest in the stock and derivatives markets where we have seen the prices of raw materials such as oil and grains at levels not seen for many years, distancing themselves from fundamental reasons, supply and demand, generating strong inflationary pressures in the economies.

Additionally, with the pandemic, the productive chains were interrupted, that is, the supply of many products that were part of the productive chain decreased, thus causing price increases that came to generate additional inflationary pressures, and to spice things up, at the end of February of this year, the war between Russia and Ukraine came, which has come to impact the supply of oil, natural gas and grains such as corn and wheat.

All of the above has had a negative impact on global economic growth, but at the same time it has generated inflationary pressures, for which central banks have been forced to change their strategy from a lax monetary policy to a restrictive one.

The problem is that if they raise their interest rates too strongly and quickly, the central banks could quickly reverse the recovery of the economy from the pandemic and fall back into a recessionary period.

On the contrary, if they do not act forcefully enough, inflation could get out of control, hence the strong dilemma about how much to raise rates and when.

For now, the International Monetary Fund already cut the growth expectation at a global level last week to place it at 3.6%, while for Mexico it lowered it to 2%; however, several analysts consider that this is an optimistic calculation for our country, since several consider that we will be closer to levels of 1%, which is undoubtedly serious, since we would still not recover from the sharp drop in 2020 caused by the pandemic.

On the inflation side, the data on consumer prices was published in the United States, which stood at 8.5% for March, and although it is true that some analysts consider that this level could be the peak, the truth is that it also Many believe that the Fed was slow to act on inflation.

In Mexico, the Inegi published the inflation data which was located at 7.72% at the annual rate, its highest level since January 2001, and the underlying rate at 7.16%, which, without a doubt, has been felt in the pockets of the consumers.

On May 4, the Fed will meet to determine how much it will raise its reference rate to control inflation and the market discounts with a probability of 99.6% that this time the rise will be 50 base points to take it to levels between 0.75% and 1 percent.

It will be enough?

Place your bets.

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