An explosive mix of slack and precision food

officials’ letters european central bank, And representatives of other central banks, during the annual meeting of the European Central Bank that took place a week ago in Portugal, confirmed something we have all understood for some time: that the process of raising benchmark interest rates by the central banks of the United States of America and the European Union (and not only these) has not arrived yet. to an end.

Obviously the leader PowellPresident Lagarde and the collaborators They remain dissatisfied with the inflation response to continued interest rate hikes and consider it more flexible than they can afford.

the investorsthe Analysts and the economists They consider it certain that we will see further increases during the year and that the markets have lost all hope of starting the reverse process in 2023. It turns out that the certainty that we will soon see the famous Federal Reserve hubthat is, the sudden change in the Fed’s course, was out of reality.

So as markets brace themselves for a much longer period of higher interest rates (according to the experience of most analysts and investors), there have been more voices arguing that higher interest rates will eventually bring the economy to its knees. Of course, it would be a remiss if we did not mention that these sounds have been heard for a long time without actually checking them. But that doesn’t mean we should ignore them. If he is right Bill Dudleysuspended «Bloomberg», Former President of the New York Branch of the Federal Reserve and for several years chief economist Goldman SachsSo we should start thinking more seriously about the consequences of higher interest rates for the path of the economy.

Dudley, who has been insisting since early 2022 (and rightly so) that the state of the economy calls for a much larger increase in record prices than most analysts expect, said in a very recent editorial that it would happen soon. We see a significant increase in yields on the most important US government bonds. Dudley estimates that those returns will at least go up 4,5%, from 3,85% It is these days and it will be there for some time. If this happens, it will be the highest yield since 2007. The experienced banker and economist believes that a rise in yields to these levels is inevitable if we really want to tame inflation.

If we take into account some obvious signs of slowdown Which the US economy is already showing (as we know that the path of the US economy always affects the same as the EU), we must conclude that if central bankers do not change their mind soon, the economy will soon suffer great pressure. Yesterday’s economic data in the United States showed that most of the indicators related to manufacturing activity are already below 50, which means that they are in a contraction stage. Unless we see a deterioration in the labor market soon and structural inflation remains resilient, we will have a situation where the Fed will raise interest rates at a time when there are already signs of weakness in the economy.

As long as it is done it will come back Government bonds If things go the way Bill Dudley predicts, the risk of a sharp downturn in the economy will increase exponentially, as 4.5% on the 10-year note is something that will put a lot of pressure on many companies and will certainly bring back anxiety about it. In the US banking system and not only there.

In theory, the possible slide of the economy into recession, besides many negative effects, would also have a side benefit for citizens. Logically, it will decrease economic inflation Prices of various products will fall due to lower demand in all sectors of the economy. But there is one area in which skepticism is expressed about whether prices will actually go down: food prices.

We are deliberately referring to lower prices rather than lower food inflation, because keeping food and agricultural prices at current levels well above those of spring 2021 will not provide significant relief to citizens who have seen food costs soar. The truth is that many experts agree that a significant drop in food prices is something we do not expect to happen anytime soon, unlike what we saw in fuel prices, which returned to levels much lower than they were in 2022.

The main reason cited by those who estimate that it is not easy to see negative inflation in the food sector is the significant increase in labor costs and the difficulty in finding workers. In yesterday’s English report “guardian” Senior officials at UK supermarkets have been very cautious about when food price cuts will start, estimating that they almost certainly won’t happen until 2023.

We can add that another reason for the delay in lowering prices is the fact that the cost of foodstuffs to citizens did not begin to rise at the same time as the price of agricultural products on international markets began to rise, in contrast to what happened to fuel. This means that, on the other hand, we will be late seeing the decline witnessed by these products in the international markets. Hoping, of course, that we will not have negative developments such as, for example, significant damage to the harvest of basic agricultural products due to weather conditions, or the termination of the United Nations program for the safe transportation of Ukrainian grain and other products across the Black Sea.

Of course, we cannot be sure that Western economies will eventually begin to contract and enter recession under the weight of rising interest rates. Of course we’re not sure, but we think the chances of that happening have increased. If that happens, it will certainly make life very difficult for the citizens, especially if it happens soon enough, before enough time has passed to finally see food prices go down. This combo isn’t flattering at all, but we can’t ignore the fact that the chances of it turning out to be real aren’t slim at all.