Fighting inflation will have a painful cost

<p>Kia ora,</p><p>Welcome to Thursday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the International edition from Interest.co.nz.</p><p>Today we lead with news 'growth' is to be sacrificed to get the inflation genie back in the bottle, and the resulting pain accepted as the cost of doing so.</p><p>First, softer consumer spending and higher inventories put the <a href="https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-first" target="_blank"><strong>US Q1 GDP</strong></a> further into 'negative territory' in their final revision on economic activity in the March quarter. Although these latest revisions were minor, they did feed into recession jitters in financial markets.</p><p>But American <a href="https://www.mba.org/news-and-research/newsroom/news/2022/06/29/mortgage-applications-increase-in-latest-mba-weekly-survey" target="_blank"><strong>mortgage applications rose</strong></a> slightly last week while their benchmark 30 year fixed mortgage rate fell. That juiced up refinancing activity.</p><p>Meanwhile, speaking at an ECB meeting, the US Fed boss reiterated the US central bank's commitment to do-whatever-it-takes to control high inflation includes risking a recession. He said the bigger risk is to fail to restore price stability. Powell said there is a risk the US economy will slow more than they want to see but painful shocks may be a price that has to be paid. He also confirmed the Fed will raising rates fast and aims to move into restrictive territory fairly quickly. Either another +75 bps or +50 bps increase is expected at their July 28 meeting.</p><p>More positively, Japanese <a href="https://www.meti.go.jp/statistics/tyo/syoudou/result/sokuho_1.html" target="_blank"><strong>retail activity is rising</strong></a>, and by more than was expected. It rose by +3.6% in May from the same month a year ago, and the April data was revised up to +3.1%. This is now the