On Wednesday, the US Federal Reserve raised interest rates by 0.25 percentage point.
Chairperson Jerome Powell did sound upbeat about inflation, stating that the Fed recognised that it was cooling.
“We can now say I think for the first time that the disinflationary process has started,”Jerome Powell, Chair said.
Powell cautioned that it was too soon to declare victory over the highest inflation in decades.
Professor Adrian Saville, Investment Specialist at Genera Capital, explains what Powell meant by “disinflation” to Bruce Whitfield.
Simply put, the term refers to inflation, but falling inflation rates.
“For instance, if we go to December and January of 2021 and early 2022 interest rates were sitting at 8-10% in the US. Then as we progressed through 2022 they steadily come down to 6 and 7%, and more recently it’s starting to hang around in the 5% territory,” Prof. Adrian Saville, Investment Specialist – Genera Capital said.
“As that inflation rate falls, that’s what is referred to as disinflation. Prices are still rising… but they’re not rising at the same pace as they were a year back, i.e. 10%..”
Prof. Saville observes that, while interest rates and monetary policy are blunt instruments, they also have lag effects.
“So what you’re seeing now in the falling inflation rate is a response to interest rate action of six and nine months ago, which means we might have seen the bulk of the pain put into the system.”
We need to keep in mind though that while prices have fallen, wage inflation has set in which is something that “fuels the inflation fire”.
The rand strengthened by around 2.5% as a result of the Fed’s announcement. “The implications for South Africa in terms of a strengthening rand is good news because that will mean the prices of our imports fall, it means our global purchasing power is better…
“…but the rand at 17 to the dollar is still a long, long way from fair value. Fair value for the rand to dollar is closer to 15 territory.”