Rough Over There

Mike Zaccardi

INFLATION IS TAKING its toll on Americans’ view of the economy. But things could be a lot worse. Exhibit A: Europe.

Last week, the U.K. reported its inflation rate had surged to a four-decade high of 9.4%. June’s reading was a significant bump up from May’s 9.1%. Even higher inflation is expected as year-end approaches, with the Bank of England seeing annual inflation hitting 11%, according to The Wall Street Journal.

In fact, consumer prices across Europe are rising rapidly amid surging energy costs. As much of the U.S. baked in the July heat, all-time record hot temperatures were notched in major population centers across the pond. Sky-high costs for summertime cooling are crimping consumers’ pocketbooks, with food and housing-related expenses also on the rise. To combat the energy crisis in Germany, streetlights are dimmer and people are taking shorter showers.

Americans headed to Europe will no doubt notice that their travels are cheaper, thanks to a much weaker euro. The financial press pounced the instant the U.S. dollar and euro hit parity. The “Big Mac Index” is often used to illustrate how cheap or expensive other parts of the world are relative to the U.S. Right now, a strong dollar means relatively inexpensive McDonald’s burgers in Europe.

Last Thursday, to combat rising inflation and a falling euro, the European Central Bank issued its first interest rate increase since 2011. Meanwhile, we’ll learn the U.S. Federal Reserve’s next move on Wednesday afternoon. The financial markets expect another 0.75 percentage point rate hike to cool off the 9.1% headline U.S. inflation rate. The big question: Will these rate increases break the back of inflation—or do further big increases lie ahead, which would likely mean more turmoil in the stock and bond markets?

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