Euro drops below parity with dollar after US inflation hits 9.1%

 

The inflation figure makes an interest hike more likely later this month, and also increases pressure on US President Joe Biden ahead of November's congressional elections.

The euro has dropped below parity against the dollar the first time in almost two decades after news that US inflation reached 9.1% in June.

The figures will place further pressure on the Federal Reserve to hike interest rates by 75 basis points later this month, as raising interest rates is one of the tools used by central banks to fight inflation.

The 9.1% surge - the highest level in 40 years - is compared to the same month last year, and is up from the 8.6% jump seen in May.

On a monthly basis, prices rose 1.3% from May to June, after rising 1% from April to May.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: "This disappointment means that a 0.75% hike from the Federal Reserve at their next meeting is an absolute certainty and there may even be pressure from some quarters for them to do more.

"Central banks are clearly struggling to get a handle on inflation and if this number continues to grow or hover around this level then more will be required to drive it down, regardless of the economic consequences this may have.

"Markets are likely to remain volatile on the back of this although the fall in the oil price in recent days does offer some hope that inflation pressures will begin to ease later in the year.

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"However, there needs to be signs soon of this translating into the inflation rate."

Concerns for Biden ahead of November elections

Grocery prices were up 12.2% compared with a year ago - the steepest climb since 1979 - while rents rose 5.8%, new car prices were up 11.4%, and air fares increased by 34%.

The effect on American consumers has hurt President Joe Biden's approval ratings and poses a big threat to his Democratic Party as the November congressional elections approach.

Some 40% of adults in a June AP-NORC poll said that tackling inflation should be a top government priority this year - just 14% said this in December.

Could inflation be reaching a short-term peak?

Despite all of this, some economists think that inflation might be reaching - or at least nearing - a short-term peak.

Fuel prices have fallen slightly, although they are still far higher than they were a year ago.

 Shipping costs have started to fall as the US's two big western ports - Los Angeles and Long Beach - start to get on top of the backlog of ships.

Commodity prices are also starting to come down - oil fell on Tuesday to about $96 a barrel, while metals such as copper are falling in price due to recession fears in the US and Europe.