Gas prices continued to cause consumers pain in late 2022 even after they dropped from their highs of earlier in the year. Inflation was felt by all Americans at the grocery stores in 2022, when demand for many goods and services exceeded supply.
Inflation experts had hoped to see a decline in inflation after 2021, but supply chain problems and the Russian invasion of Ukraine have exacerbated this trend.
Experts predict that the Federal Reserve, even if core inflation drops below 6% in the first quarter of 2023 and the Federal Reserve raises rates one more time before the end of the year to combat inflation. The Fed's inflation target is only 2%. Therefore, the 5% rise in the CPI report for March is still higher than what should be.
Could it be worse? It turns out that it could be worse.
The Key Takeaways
This situation changed with the Russian invasion of Ukraine. Investors are concerned about inflation, especially when they want to invest on foreign markets using the U.S. Dollar or consider the effects of a global economic recession on the U.S. Stock Market.
Which is worse, the inflation in the Eurozone or the U.S.
In general, the eurozone has a higher inflation rate than the U.S. Looking at the individual countries within the Eurozone, however, the U.S. is ranked higher than some European countries, while ranking lower for others.
Inflation in March 2023 in the U.S. was 5.0% higher than in March 2012. Eurostat, the statistical agency of the European Union (EU), has predicted that the eurozone's annual inflation rate for March will be 6.9%. The official data should be released in Europe later this month.
The most significant difference is when we compare only G20 European countries. We will only use the official inflation figures from February 2023 to ensure greater accuracy.
The following countries in the Eurozone have higher inflation rates than the U.S.
In February 2023, the UK's inflation rate was 10.4%.
Why is inflation higher in Europe?
Inflation has been a global problem for the past year. In the beginning, it was the pandemic that sparked this issue. The U.S. issued stimulus checks during the pandemic to assist people who were struggling with unemployment, and to stimulate economic activity.
The stimulus checks do encourage inflation in part by increasing the demand for products that were affected by the pandemic.
The Russian invasion of Ukraine, which took place in February 2022, also contributed to inflation. However, it did not affect all economies equally. Energy and food are the two most important sectors where we saw global inflation after the invasion.
Ukraine is often referred to as the breadbasket for Europe. The food needs of large populations living outside Europe are also dependent on Ukrainian exports, but the Eurozone has been hit especially hard since the beginning of the war.
The U.S. Energy and Russian Energy
Although many countries are dependent to varying degrees on Russian gas and oil, European nations were among the worst hit when they imposed sanctions against Russia following the invasion.
Even before 2022's aggressive sanctions, the U.S. relied less on Russia to provide resources such as natural gas and food. In 2021, 8% of U.S. petroleum supply came from Russia. The U.S. had its own Strategic Petroleum Reserve (SPR), from which President Biden used throughout 2022 in order to stabilize gas prices.
The U.S. has become less dependent on Russia due to pure necessity. Natural gas can be difficult to transport. Geographically, the U.S. has been so far away from Europe that it had to develop its own infrastructure. Canada's natural gas industry is also a big plus in North America.
Distance also makes it difficult for the U.S., to supply this resource to their European allies at a time when they are most in need. The demand for energy increased as winter approached the northern latitudes of Europe, which in turn exacerbated the supply issue and inflation.
How has Europe fought inflation?
The monetary policy in Europe is very similar to that in the U.S. The Federal Reserve (the European Central Bank's equivalent of the Fed) and the European Central Bank aggressively increased rates through 2022 in order to combat inflation.
These rate increases could result in a lower inflation, but a recession is also possible.
When borrowing costs increase, people tend to spend less. This can lead to a decrease in inflation. As consumers spend less, profit margins shrink. This leads to layoffs, as companies try to cut labor costs to trim their budget. As employment becomes harder to come by, incomes become scarcer, making it more difficult to purchase essential items.
In recent months, the inflation rate in most EU countries has decreased.
It is true only for certain countries. In Latvia, for example, the annual inflation rate has been above 20% every month since January. Early estimates for March's inflation data indicate that they will finally be able to get below this threshold. But we'll just have to wait and see.
Germany has not yet seen its annual inflation rate fall as rapidly as a country such as Belgium. Germany's annual inflation rate actually increased between January and the February 2023. However, Eurostat predicts that it will fall by 1.5% in March, to 7.8%.
What does European inflation mean for your investments?
International markets are affected by global recessions. People are less likely to invest money in the market when they don't feel good about their finances. This could be because of their fears about the future or that they don't have enough money to invest now.
Investors who are worried about the future profitability of corporations can pull their money from the market and further drive it down.
Investors from all over the world flock to the U.S. Stock Market, which is regarded as the most stable. Many experts are concerned that the Europeans' inflation could lead to a decrease in foreign dollars flowing into U.S. firms. This would further decrease demand and stock price.
Investors find it hard to assess the true value of a business compared to the stock value, regardless of where they are located. Investors who are less confident tend to be more skittish and opt for safer investments, or keep more cash in their wallet.
Should I keep investing despite the high inflation?
When you are a long-term investment, market downturns will be part of your plan. Periods of recession and inflation will occur over a time frame of 30 years or more. This old saying is still true in the investment community. It is better to wait for the right time in the market than try to time it.
Although inflation, global conflict and the possibility of a recession are undoubtedly frightening, these things have all happened before. Stock markets in the United States have always recovered, and then some. During WWII, for example, the U.S. stock market was impacted by inflation, war, and economic hardships. But after peace returned, all three issues were eased.
When the euro falls, you can get more for your dollar if you invest in European markets. When inflation is high, the U.S. Dollar gains strength with higher interest rates. In order to keep their money safe, global investors are looking for U.S. stocks and bonds. This phenomenon has helped the USD to reach parity against the euro for the first year since 2002.
The U.S. has a higher inflation rate than most of Europe. Still, this doesn't mean that either region is doing very well when it comes to fighting rising prices. It's natural to be anxious about your investment during times such as these, even if your long-term plan includes times of economic hardship.
We will have to wait and see how certain developments will unfold, such as the response of some European countries to the higher interest rates or whether the Federal Reserve will increase the rate before 2023.
Inflation we are seeing today is partially due to the Russian invasion in Ukraine, the stimulus checks related to the pandemic, and the supply chain problems caused by this pandemic. Over time, as supply and demand imbalances are resolved, inflation should continue to decline.