RATE HIKE EXPECTATIONS STRENGTHENED.
The market now sees rates approaching 5.5 percent in the U.S. and in the Eurozone rates are expected to be close to 4 percent at the end of 2023 compared to the 3.25 percent assumed at the beginning of February. After doubting, the market is now taking central banks seriously, and hike estimates may even rise because, with core inflation at 5.6 percent in February, the expected rates still look very low unless a sharp drop finally materializes.
MANY BUSINESSES MANAGE TO DEFEND MARGINS
For households, the situation is even more difficult, but in this maelstrom of inflation, there are some favorable effects that provide relief. Bienvenu first cites the fact that not all businesses are penalized because many can pass inflation on to sales prices and maintain margins. The compensation is even greater since wages grow less rapidly than inflation and their burden may even decrease, representing “a boon,”, especially for shareholders.
POSITIVE EFFECT ON GOVERNMENTS’ DEBT/GDP
In addition, governments generally decide to reflect inflation in income tax brackets, as France has already done, which equates to a lower tax rate and thus an easing of the overall burden of inflation. Finally, Bienvenu points out, governments benefit from higher revenues because they levy a more or less stable share of GDP, which increases with inflation. If the real rates at which they borrow are negative, as is the case in Europe today, they reduce debt, and can continue to run deficits without burdening budgets.
INFLATION IN A DIFFERENT LIGHT
According to the IMF, the Eurozone had a debt-to-GDP ratio of 93 percent in 2022, declining from 2020, and the projected trajectory is pointing downward: 91 percent in 2023 and 89 percent in 2025. In the US, forecasts point to a decline from 102% in 2022 to 97% in 2023, despite a deficit of about 5%. “So inflation is not a pure curse,” and we think that , ” we will have to live with it for a long time.”