Photo: Andrew Harrer
Annualized inflation in the United States hit its highest level in more than 40 years in March, mainly due to gasoline prices, which soared especially with the war in Ukraine.
Prices rose 8.5% in 12 months, compared to 7.9% in February, according to the Consumer Price Index (CPI) released Tuesday by the Labor Department.
The report is the first to cover the impact of Russia’s invasion of Ukraine and subsequent Western sanctions against Moscow, which has sent food and energy prices soaring around the world.
In one month, prices rose 1.2%, compared to 0.8% in February. The price of gasoline in the United States alone soared 18.3% from the previous month, and accounted for about half of inflation, the department said.
This is bad news, in general, because it puts extra pressure on the Federal Reserve to increase its interest rates and, in this way, price increases in the United States may end up raising the value of the dollar in Colombia.
What will happen to the price of the dollar?
The March CPI reading seems to represent the ceiling of the current inflationary period as it captures the impact of rising food and energy prices following the Russian invasion of Ukraine.
However, despite the Fed taking a tougher stance, inflation is not likely to recede to the US central bank’s 2% target any time soon, on account of the war in Russia. and the restrictions to contain covid-19 in key places, such as Shanghai.
“The increase in inflation will gradually close the interest rate differential between the US and emerging countries, since it is pressuring the Fed to raise rates. In this way, the dollar could be strengthened with respect to those countries whose reference interest rates are lower, ”says Juan David Ballén, research leader at the firm Casa de Bolsa.
Seen from this scenario, an increase in interest rates by the Fed could well mean an almost immediate increase in the value of the dollar.
But in terms of the dollar, the value of the currency depends on several other factors, not only the rate differential, as Ballén warns. The analyst adds: “Commodity producing countries, like ours, have been favored by the high levels at which these are found. In other words, the closing of the interest rate differential that should weaken the currency is being offset by higher income from higher commodity prices”.
The point here is also that oil has been showing a certain downward trend since the end of March. Although it registers increases (and decreases), it seems that prices could be stabilizing downwards after countries like the US released crude oil reserves to compensate for the output of Russian barrels, on the one hand; on the other, the global demand for oil seems to be slowing down.
Also read: Oil is going down in price: is this good or bad news?
This Tuesday, OPEC revised down its demand growth forecast for 2022: from 4.29% to 3.79%. This comes amid uncertainty over Russia’s invasion of Ukraine and Western sanctions imposed against Russia in response to the war.
How to understand the rise of the dollar in Colombia?
Basically, the value of the dollar is tied, in one way or another, to a series of national and international macroeconomic factors, ranging from the effect of inflation in Colombia on debt bonds, through the Bank’s interest rates of the Republic and the Federal Reserve, to oil prices or the performance of the pandemic, with the appearance of new variants or improvements in scientific responses to COVID-19 (better vaccines, pills to combat the disease and so on). ).
On dollar issues, and on various macroeconomic topics, it’s useful to view the picture like a game of pool, if you will: hitting one ball leads to it moving another one, and so on.
In this case, the upward trend in inflation in Colombia has led the Banco de la República to adjust its interest rates five times since September 2021; they are currently at 5%.
Also read: Is it time to buy dollars?
In the game of billiards, then, the ball of inflation moves the ball of rates. And the latter impacts that of debt bonds, better known as TES.
With higher interest rates, credit becomes more expensive, in a way, which is not good news for those who have Colombian debt bonds, the so-called TES. It is estimated that 25% of the bonds are held by foreign investors. This means that the dollar is especially sensitive to the debt market.
And when there are moments of uncertainty, investors tend to take their dollars out of the country, and that raises the exchange rate. In short, this is what the game of billiards of the dollar in Colombia looks like.
But to these national factors, we must add the various international uncertainties that have also pushed up the dollar and the peso in the opposite direction. Between after we tell here things like: the crisis of the containers, which has represented problems of production, transport and sales throughout the world; variations in the price of oil and the development of the pandemic, with the possibility of new peaks; the duration and harshness of the war in Ukraine and its litany of impacts on the global economy, in addition to the atrocities in terms of human rights and loss of life, of course.
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