It's the real thing

Whatever the US Federal Reserve says, price rises aren't slowing and inflation may have more legs. The president of one of America's most iconic brands, Coca-Cola, has just said as much. John Murphy, Coke's boss, said the company's product prices will go up in the second half of 2023, more in emerging rather than developed markets because that's where inflation is higher. Coke put up its prices by 10% in the three months to the end of June, during a period when the Consumer Price Index (CPI) - the Fed's favored measurement of inflation - was less than half Coke's recent price increase.

Perhaps mindful of Coke's probable inflationary moves, the Federal Open Market Committee (FOMC), the section of the Federal Reserve which sets interest rates, decided to raise US interest rates by 0.25%, taking the federal funds rate to 5.25%-5.5%, the highest level since 2001. This resumption of rate hikes (after a pause in June) was explained by the FOMC as being due to 'elevated' inflation, a 'robust' jobs market, and economic activity growing 'at a moderate pace'. The FOMC decision had been widely expected, but there are doubts about its necessity. The CPI has slowed fast and is currently 3%, down from its peak last year of 9.1%. But core inflation in June - which excludes food and energy - was 4.8%, still more than twice the Fed's target rate for inflation. Another gauge, the core personal-consumption expenditures index, rose by an annualized 4.6% in June. The Fed is thus demonstrating that its past error - of describing the current bout of inflation as 'transitory' - will not be repeated, and that it's prepared to risk creating recessionary conditions rather than let inflation regain a grip.

US CPI

What comes next?

The market view is that this could be the last rate hike in the US. The CME FedWatch Tool, which tracks moves in interest-rate futures, is at 81% for the FOMC keeping rates steady at its next meeting, in September. US unemployment is at a 50-year low; the US economy is about 10% bigger than when Joe Biden became President; and, cushioned partly by energy independence, the US inflation rate is falling faster than elsewhere. Could America be headed for that elusive but yearned-for state, a 'soft landing', the end of high inflation without the creation of a recession? Yet even if that happens many Americans will not forget the fundamental cause of the inflation nightmare they have lived through - the $1.9 trillion 'stimulus' package he pushed through shortly after he took office. Even Biden's greatest cheerleader among the British media, the Financial Times., grudgingly has admitted that enormous money creation "undoubtedly fed inflation." In total the federal government pumped some $5 trillion into the US economy between 2020 and 2021.

Central banks want to avoid interest rate rises not merely because they are unpopular with voters but because they put up payments on government bonds. The UK's higher interest rates have abruptly added £50 billion (making £150 billion) to the government's bill that dates from its Quantitative Easing (QE) program dating from 2009. The US will be spending at least $663 billion this fiscal year on its $34 trillion debt. AS for the gold price's reaction, it was up after the FOMC announcement - but by less than 1%.

The market view is that this could be the last rate hike in the US.

Goldilocks beckons - maybe

It's starting to look like the Fed will be able to get its much-desired Goldilocks economy - neither too hot nor too cold. The American consumer has come to the rescue, thanks to the accumulation of savings during the pandemic, which at one point exceeded $2 trillion and is still around $500 billion according to the Federal Reserve Bank of San Francisco. Those savings will "continue to support consumer spending at least into the fourth quarter of 2023" says San Francisco's Federal Reserve. But who has those savings? That matters, simply because poorer households will tend to run down their savings faster than the richer.

In any case forecasts of a recession this year - which were common at the start of the year - now look premature. But by early 2024, when the savings may have disappeared and the interest rate hikes (which have a lengthy time-lag to kick in) start to bite, the sluggish US economy may start to slow excessively. The Fed may need to start cutting interest rates - which will dent the Dollar and push the gold price higher. President Biden will want the Fed to start cutting soon; voters considering their choice for the next President will need reminding that the incumbent is on their side.