March 24, 2023

The euro zone, or rather the euro, is a currency with an exchange rate that is implicitly linked to the dollar, yes, with a large fluctuation range to adjust to differential shocks, but delimitation it is not possible to have a highly depreciated euro against the dollar with energy prices in expensive dollars and especially much more expensive in Europe, such as gas, electricity and also petroleum products.

However, in 2022 the fear of what is considered an energy crisis and a very strong slowdown in Europe led to an increase in investments in dollars against euros beyond what could be considered as equilibrium, always knowing that the equilibrium is variable and this resulted in the ECB raising rates to avoid inflationary effects of said depreciation.

Now, in 2023 we find ourselves with a euro that is recovering positions, it is already at 1.06 dollars per euro and the causes may be various. First, that the forecast that the short-term interest rate differential between the US and Europe is not neglected, because the Americans will not rise as much and the ECB will follow them in those increases, but future decreases will be somewhat delayed. The second cause is an improvement in growth expectations or a lower decrease in Europe as a result of the drop in energy prices. This is key and it is observed that natural gas prices are below December 2021 levels, although they are very high in historical perspective. The evolution of electricity is more contained, although its future depends largely on the evolution of nuclear generation in France, and not so much on Russia. Finally, the CPIs begin to moderate, 6.7% in France, 5.8% in Spain, not only due to the fall in international prices, but also due to the protection with limited prices through different channels for consumers.

In the United States, inflation data is also moderating, but the official discourse is clear: the centrals will not stop acting as long as inflation does not reach the targets of around 2%. The problem is that it seems to discount that this will not happen for a long time, reasoning that I do not agree and that in any case it has to take into account that we have had an epidemic that has very clear effects on the functioning of the labor market (it has generated a lack of workers in recovery because there were retirements and lack of training in those years and this requires time to be resolved). In any case, the price-wage spiral is not taking place and the supply shock seems to be lessening its force (less external pressure to raise prices).

I know that this vision known by some as “stainless inflation” is seen as very optimistic. The shock disappears and since there is a loss of income due to not having wage increases of the same magnitude, the inflationary pressure moderates hard. The problem is that if this is the case, and the central banks operate with rapid interest rate hikes, they will lead us into a relatively severe recession. A skyrocketing demand is not observed in Europe. In fact, in Spain neither national income nor consumption are at pre-pandemic levels, so I don’t see demand inflation pressure.

In my opinion, this shock is similar to that of 2009-2013, only that it affects electricity and gas, which is why it has a greater impact on consumption and on the so-called core inflation, which is largely inflation of energy and utility costs. transport derived from the shock of the invasion of Ukraine and the post-covid shock of recovering inventory levels.

One wonders why, if inflation in Spain rose exactly the same between 2009 and 2013 as between 2020 and 2022, nobody or very few spoke of inflationary risks then.

I believe that the energy shock is easing and the cost of maritime transport has completely disappeared, and this will moderate the inflation of food via transport costs and fertilizers. Let us remember that residual inflation in Spain -energy and food- is 20.1% of the total, that is, if it moderates, the global CPI will fall in 2023. Finally, we do not have that non-energy industrial goods rose 4% in 2022, largely due to problems in international transport chains, which currently do not exist.

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