Central Banks Sometimes Can’t Win `Em All!

Good Morning Ladies and Gentlemen

””Wall Street will sell shit as long as shit can be sold”

Charlie Munger

Navigating U.S. interest rates can often feel like a rollercoaster ride in the unpredictable realm of finance. While investors seek that perfect win, it is important to recognise that not every decision will succeed. Embrace the journey, learn from both the highs and lows, and maintain your focus on the long-term goals!

U.S. Inflation

According to the latest consumer price index, U.S. inflation increased by 0.3% in June compared to the previous month, surpassing economists‘ consensus expectation of a 0.27% rise. The annual inflation rate stood at 2.7%, again exceeding the anticipated 2.6%. The yearly rate of core inflation was reported at 2.9%. This, Ladies and Gentlemen, indicates that US inflation continues to exceed the Federal Reserve’s target of 2.0%.

Tariffs and Their Potential Impact on Inflation I

In April, US President Donald Trump announced substantial special tariffs on imports from numerous countries. Though some of these tariffs were later suspended, new agreements with various trade partners were reached and are in the process of being reached, and a base tariff rate of 10% remains in effect. US Federal Reserve Chairman Jerome Powell has already cautioned on multiple occasions that any tariff increases this year will likely elevate prices and strain the economy.

Tariffs and Their Potential Impact on Inflation II

No wonder the question of whether tariffs contribute to rising inflation rates has garnered considerable attention in recent economic discourse. Notably, June’s above-mentioned consumer price index demonstrated a marginal increase that exceeded initial expectations. This raises the question of whether implementing tariffs is beginning to exert upward pressure on prices. While a definitive correlation is difficult to establish at this juncture, it is essential to consider the probability of tariffs influencing inflationary trends. Future analyses will be necessary to illustrate the relationship between these economic factors more conclusively. In an initial statement on this year’s half-year figures, Paul Jacobson, General Motors Co.’s CFO, said in an interview on Bloomberg TV that President Donald Trump’s tariffs cost the automaker $1.1 billion in profits. However, GM has not yet increased its retail prices.

Tariffs and Their Potential Impact on Inflation III

So far, none of this definitively indicates that tariffs will lead to another price spike. However, it does imply that the progress made on inflation has stalled without ever reaching the Federal Reserve’s target. Furthermore, concerning the cost of living for the working class, a central issue in last year’s presidential election, the trend is again heading in the wrong direction.

Meanwhile, at the ECB

The eurozone’s key interest rate remains at 2%, as the European Central Bank (ECB) has opted for a pause in interest rates after seven consecutive cuts. This decision marks a pivotal moment for the ECB, as it navigates a challenging economic landscape. Under the leadership of President Christine Lagarde, the Governing Council of the ECB has lowered the key interest rate seven times in succession. During a meeting in Frankfurt am Main on Thursday, they resolved to maintain the benchmark deposit rate at 2%, the rate at which banks earn interest on funds held at the central bank. Most market analysts anticipated this decision. Lagarde had previously indicated that we might witness the „end of a monetary policy cycle“ after the last meeting in June. She has successfully achieved the inflation target of 2% for the eurozone, which very recently ticked up from 1.9% in May to 2% in June.

Tariffs and Their Potential Impact on Inflation IV

What is true for the U.S. is certainly also true for the countries at the other end of the “deals”. All the central banks must contend with a challenging environment marked by economic uncertainty, largely driven by developments in the United States. For example, we all witnessed President Donald Trump’s recent announcement of a 30% tariff on EU goods, set to take effect on August 1. In response, the European Union is now preparing countermeasures. EU Commission President Ursula von der Leyen has proposed a package with up to 30% counter-tariffs on US products worth approximately EUR 90 billion, targeting iconic American items such as jeans, whiskey, cars, and aeroplanes. Hopefully, there will be a deal soon for both sides.

Conclusion

As the title of today’s “Stefan’s Weekly” indicates, central banks occasionally find themselves in a tough position! While lower interest rates would certainly benefit consumers with mortgages and personal credit, as well as assist governments in managing their substantial debt, we must not underestimate the potential risk of igniting rampant inflation.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li