The Eurozone celebrates what is largely contained inflation. On the other side of the Atlantic, however, the United States’ Federal Reserve is concerned about rising prices that remain threatening.
In the current environment, investors are closely monitoring every price indicator in the United States, seeking to gauge the impact (or lack thereof) of the tariffs imposed by Donald Trump on products imported from around the world. The latter are likely to increase the price of imported products for American consumers, thereby contributing to inflation.
The stakes are high for two main reasons. First, household consumption spending represents nearly 70% of US GDP. If prices rise too much and consumers can no longer afford to consume, growth will undoubtedly suffer.
Inflation must be controlled before rate cuts
Equally important, the Fed must ensure price stability. At the same time, it is expected to lower policy rates to make credit cheaper, which would help with consumer spending and investment.
But these objectives are not necessarily compatible. It can only return to the path of rate cuts if inflation appears to be under control or on the verge of becoming so. At this stage, with inflation at 2.7% and the effect of customs duties becoming clearer, investors have the right to doubt it.
A more stable scenario in Europe
The dynamic is quite different in the euro zone. Since May, inflation has been around 2.0%, in line with the European Central Bank's objectives. Of course, the decline in energy prices - caused by the fall in oil prices, as well as the appreciation of the euro against the dollar, which makes imported products cheaper - has a significant impact.
But even the core index, which excludes energy and food, rose only 2.4% and the rise in services prices, one of the primary sources of inflation for some time, is gradually slowing. The main reason for this gradual easing is private demand, which remains sluggish and is set to remain so.
Without the US, more imported products in Europe
In addition, since the United States has closed the doors of its market to a certain number of imported products, the latter will look for outlets elsewhere, particularly on our continent.
It is therefore a safe bet that, unless Europe opts for new protectionist measures, competition in our markets will become tougher, which could well translate into downward pressure on prices.
So, at this stage, several members of the ECB's monetary policy committee are worried not that inflation will rebound in the near future but that inflation will be far too low.
Patience is a virtue
Faced with the small growth in the 2nd quarter (+0.1% compared to the previous quarter) and inflation finally in line with its objectives, the ECB can afford to be patient, waiting to see more clearly the impact of US tariffs on international trade before acting on its interest rate policy.
But one thing is clear: at this stage, it would have less difficulty justifying a further cut in its key rates than the US Federal Reserve. The prospect of cheaper credit is a significant asset for our highly indebted economies and clearly appeals to investors.
United, but not that much
Unfortunately, while economic activity is encouraged by cheaper credit, especially when households are inclined towards credit and do not hesitate to spend at will, other factors also play a crucial role.
And that's where the problem lies. Weighed down by a cumbersome regulatory framework, an uncompetitive tax system, and a higher energy cost compared to other major economic blocs, Europe lacks the necessary assets to attract investment.
In addition, as the Draghi report reminds us, the single market remains to be built in many sectors, where national interests weigh more heavily than those of citizens who would benefit from increased competition.
Europe must be a protagonist
There is also the loss of leadership in many sectors over which Europe once reigned supreme, the ageing infrastructure of many countries, and a capacity for innovation that is no longer able to compete with our competitors in America or Asia.
On the front of new technologies or the energy transition, Europe is today a conquered land for the American or Chinese giants. And at a time when the dependencies of one or the other are becoming weapons of choice in conflicts between countries and blocs, these dependencies could prove catastrophic.
Of course, in the short term, this is of little interest. A slightly cheaper credit, a job market that is doing very well, and which is even in short supply in many sectors, should allow our economies to continue to survive.
But make no mistake: in relative terms, Europe is losing its competitiveness and becoming poorer.
Medium and long-term strategies are needed
In the short term, the inflation under control and the ECB's more expansive room for manoeuvre, which will sooner or later result in cheaper credit, are undoubtedly good news for the euro area.
Nevertheless, in the medium and long term, Europe's challenges remain significant, likely condemning our economies to overall sluggish growth. We recommend several European equities that are likely to perform well.
See our complete portfolio recommendation below:
Inflation In The Euro Zone
In line with the ECB's objectives since Spring, inflation in the euro area allows our central bank to see it coming – and to act if it so wishes. This is undoubtedly good news for our economies.