Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Annual inflation in the UK has dropped from 4 per cent to 3.2 per cent over the first quarter of 2024. Yet markets are now pricing in around two 25bps rate cuts this year compared to the six they had priced in at the start of January. Why?Six cuts may have been ambitious to begin with. But the recent rise in rate expectations has been driven first by the possibility of “higher for longer” rates in the US and secondly by slightly higher than expected price growth prints (CPI in March came in a whole 0.1 percentage points higher than anticipated!). Both reasons are flawed, as one can probably sense.Yes, a stronger dollar might eventually feed through to costlier UK imports. But the BoE would likely place more emphasis on the tightening in financial markets that comes with a stronger dollar, and transmits faster. Meanwhile, pricing rates warrants an assessment of where inflation is heading. Above-expectation data (for months already gone by) raises concern that underlying price pressures may be rebuilding, but the next step is to assess if that is true — rather than simply extrapolating it.When annual CPI is broken down into its key components, its clear that it is mostly driven by services right now. Food and non-energy contributions have eased, and energy is actually pulling inflation down.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.That’s the snapshot — it says nothing about where those contributions will be in the months ahead. So let’s look at each element in turn — starting with food.How much consumers pay in the superstores reflect price pressures in the supply chain. Growth in producers prices for imported food materials and home produced food materials have fallen sharply over the past year. These changes percolate through the supply chain with a lag (six months or so seems to map on to consumer prices well). As such, end consumer food price growth should continue falling:Now, energy. These price pressures also look tame. Gas prices help set the wholesale price of electricity. It again impacts consumer prices with a lag. Pushing it forward by around 12 months suggests the current trajectory of CPI energy inflation will remain low at least in the coming quarters (the energy price cap is also coming down):You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Of course, food and energy are volatile components. They are vulnerable to shocks. But, in the base case, at least there does not seem much cause for concern. Even then, it’s better to focus on core inflation.Starting with goods. Factory output price growth, pushed forward by a quarter matches up well with non-energy goods inflation. With supply chain pressures easing, and higher interest rates stretching manufacturers, it’s likely that price pressures in goods will continue to track producer price growth down:Next, services. There is a fairly solid relationship between wages and services inflation. But what direction are they headed? The vacancy to employment ratio in services, a proxy for worker demand, is a decent indicator for future wage pressures. It is back to its pre-pandemic level, and suggests wages will continue to ease. Other indicators, including the BoE Decision Makers’ Panel Survey shows firms expect their wage growth to decline by 1.5 percentage points over the next 12 months:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Further cooling in the labour market, in part, depends on how tight economic conditions are in general. Annual growth in M4ex, a measure of broad money supply, has been particularly weak since last summer — partly reflecting the impact of higher rates. There is a rough 18 month-ish lag between annual growth in M4ex and its impact on UK inflation (it takes time for credit and liquidity conditions to hit the real economy). It is not perfect, but if we take the relationship at face value, UK annual CPI could be hovering around zero in a year and a half. (Former BoE Chief Economist Andy Haldane said in February that he thinks the BoE risks deepening the UK’s recession if it does not start cuts soon.)Summing across the leading indicators for food, energy and goods over the coming quarters suggest annual UK inflation could soon drop below the two per cent target, and may even be closer to zero at the start of next year. How much lower inflation goes depends in part on one’s assumption of how persistent wage growth will be, and how much one thinks demand will drop below supply capacity. But, looking at current trends in wage growth, and what money supply growth suggests for forthcoming economic activity, it seems reasonable to think services inflation will come down somewhat too. Paul Dales, chief UK economist at Capital Economics, concurs: Our view is that average earnings growth slips to around 2 per cent, but then ‘settles’ around 3.5 per cent. The latter is consistent with CPI services inflation falling back to levels consistent with the 2 per cent inflation target.As a result, Dales think that core inflation could hover around 2 per cent over the coming year (with a dip below target next year). And after factoring in the price dynamics in goods, food, and energy, he thinks CPI inflation could fall below 1 per cent later this year. In summary: — The market is overreacting to stickiness in America – and some higher than expected readings in the UK – and wrongly extrapolating from those developments— Britain’s disinflation narrative remains alive and well. Services inflation needs to come down further, but its trajectory — and the economics underpinning it — look promising. Elsewhere, goods, energy and food inflation will pull headline inflation down. (Barring any further substantive shocks).— Recent inflation prints should not change the BoE’s view too much. It expected CPI to average 3.6 per cent in Q1 — it came in closer to 3.5 per cent. (Markets are making more of a fuss about the 0.1 percentage point above expectation March print)— The Bank needs to make more cuts – and probably sooner- than the market currently thinks. Any dithering may just elongate the need for ‘lower for longer’ later on. More

The Art Institutes was a private-for-profit system of art schools in the United States that faced a host of legal issues and closed last September.The Education Department found that The Art Institutes and its parent company, Education Management Corporation, made “pervasive and substantial misrepresentations to prospective students about postgraduation employment rates, salaries, and career services during that time.”The measure brings the total amount of student loan debt relief put in place by the Biden administration to nearly $160 billion for nearly 4.6 million borrowers.Progressive voters, whom Biden, a Democrat, hopes will support him against Republican challenger Donald Trump in the November election, have pushed the White House to address student loan debt. Biden last year pledged to find other avenues for tackling debt relief after the Supreme Court in June blocked his broader plan to cancel $430 billion in student loan debt.As of June 2023, approximately 43.4 million student loan recipients had $1.63 trillion in outstanding loans, according to the Federal Student Aid website. More

(Reuters) – A growing number of Federal Reserve officials don’t see a return to the ultra-low interest rates that prevailed before the COVID-19 pandemic due to everything from ballooning federal deficits to demand for investments in green energy, artificial intelligence and domestic manufacturing. The U.S. economy has held up remarkably well in the face of the stiffest rate hikes in a generation, with unemployment low and growth – until recently – mostly above trend. Meanwhile progress on returning inflation to the Fed’s 2% target has stalled out this year after rapid gains last year, leading some to wonder whether something has changed that could require a generally higher level of interest rates to keep price increases in check.Initial evidence of a change in thinking among some Fed officials came at their March meeting, when policymakers’ median estimate for the longer-run federal funds rate was nudged up to 2.6% from 2.5%, where it had largely resided since early 2019. The heads of the Dallas and Cleveland regional Fed banks, for instance, sense something new is afoot.Dallas Fed President Lorie Logan, speaking in April, noted seven policymakers saw a longer-run policy rate of 3%, up from three with that view a year ago. Indeed, an upshift was evident among those still not ready to envision longer-term rates as high as that: Just one official in March estimated a longer-run rate below 2.5% versus five a year earlier.Cleveland Fed President Loretta Mester, meanwhile, said last month she raised her longer-run fed funds estimate “to reflect the continued resilience in the economy despite high nominal interest rates and higher model-based estimates of the equilibrium interest rate, R-star.”To be sure, the shift seen in March’s projections was small, and some like Fed Chair Jerome Powell cautioned against reading too much into it at this stage. Ahead of this week’s policy meeting, which ends later on Wednesday, others have said it’s far too soon to make a judgment on R-star and that the rate in any case is not central to the current debate.STAR WARSR-star is Fed speak for the neutral or natural rate of interest, the level of rates that neither propels nor restrains the economy and that should be in place while growth is expanding and inflation is low and stable.Fed officials aren’t the only ones wondering if it may be higher. A New York Fed survey of major banks ahead of the March meeting found dealers estimating a longer-run rate of nearly 3%, up from 2.5% the prior March.Analysts at TD Securities told clients in a recent note, “we continue to assume that the long-run nominal neutral rate is now likely 50 basis points higher at 2.75%-3.00%, but can’t discount a somewhat higher level closer to 3.50%.” And the San Francisco Fed said in a report its in-house view on the longer-run rate stands at 2.75%. A consensus on why R-Star might be rising is elusive. “Ask 10 economists to get probably 20 answers,” the New York Fed’s Roberto Perli, who manages the central bank’s holdings of cash and bonds, said last month. Logan in her April speech cited rising federal deficits that have expanded the supply of government bonds on the market, booming investment demand and perhaps the start of higher productivity growth as possible reasons. “All of these factors should raise the neutral rate, all else equal.”‘R-SASQUATCH’A higher R-Star can have both short- and long-term implications for monetary policy and may explain why the highest interest rates in roughly a quarter century haven’t slowed the economy much, if at all. Over the longer run, a higher R-Star would signal persistently higher borrowing costs and better returns for savers. It also means the Fed’s rate would need to be higher, although that is not without some upsides, Charles Evans, who led the Chicago Fed from 2007 to 2023, said last month. “You’d have more capacity to cut rates if you actually needed it,” Evans said, and the Fed would be less likely to find the funds rate hitting the near-zero levels that prevailed for most of the decade before the pandemic.Not everyone at the Fed is on board the higher R-star bandwagon, including Evans’ successor.”I started calling it R-Sasquatch because it’s fundamentally not observable,” Chicago Fed President Austan Goolsbee said last month. “I’m mostly looking at the historical, recent historical, what’s a real federal funds rate, that’s kind of my indicator” for setting policy, Goolsbee said. “I’m a little impatient with the argument that you would see wild swings in long-run interest rates over a short-run period.” Fed Governor Christopher Waller, speaking in March, expressed skepticism as well. “You have to explain to me why real rates on the safe liquid government debt fell for 40 years and why suddenly it turned around, and no one’s really given a lot of very good answers,” Waller said. Meanwhile, New York Fed President John Williams, a leading researcher into the R-Star concept who has contended he expects a return to a low-rate world at some point, doesn’t see the issue having much relevance for policymaking right now. “I am not coming in any day of my life, and especially not in the days of the FOMC meeting, thinking my estimate of R-star is X and I’ve got some formula for what the interest rate should be,” Williams told reporters last month. He added the concept is useful for broader thinking about the economy, but at the current point, thinking about it having shifted higher is “speculation.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The head of the World Bank has warned wealthy countries that it would be shortsighted to “ignore” Africa at a time when development budgets are being strained by wars in Ukraine and Gaza.African heads of state are pushing for $120bn in aid to boost development and fight the effects of climate change as deadly floods sweep parts of the continent and drought strikes others.World Bank data has shown that one in three low-income countries eligible for its International Development Association, which offers grants and concessional loans, is worse off than it was on the eve of the pandemic four years ago, with most of those in Africa.“Ignoring Africa is like ignoring the future of where the world’s going,” Ajay Banga told the Financial Times in Nairobi, where he attended a meeting of African heads of state to discuss an IDA replenishment.Africa’s population is set to nearly double to 2.5bn by 2050, when one in four people in the world will be African. Banga said Africa’s youth was its most vital asset but at risk of being neglected.“The purpose is to cater to this ‘demographic dividend’,” added the former Mastercard executive.The IDA offers grants and concessional loans to 75 low-income nations, more than half of them in Africa, to boost development and, increasingly, to combat the effects of climate change. Since 1960, it has provided $533bn, becoming a key source of donor funds that helped improve the economies of countries such as China and India.“Crises divert money from everywhere,” Banga said of the competing demands for cash. “The question really is: ‘Can you make the case properly for why IDA for Africa is needed now?’”Banga’s warning that Africa risked being squeezed of development funds was echoed by Abebe Selassie, the IMF’s Africa director, who said bilateral budget assistance from the EU, UK and other donors had been declining at an accelerating rate.“In the past there used to be quite a lot of budget support to a lot of the poorest countries in the region, but this has been on a trend of decline,” Abebe said, adding that the World Bank and IMF had needed to step in to fill the gap. “The most depressing thing is that even humanitarian support has been declining.”African countries argue that high levels of debt and high borrowing costs leave them unable to cope with extreme weather events caused by global warming. They are pushing for more concessional funding and pauses in repayment schedules when natural disasters strike.William Ruto, Kenya’s president, said his country and the wider east Africa region faced “severe flooding that has devastated communities, destroyed infrastructure and disrupted our economies”.Floods last month that killed more than 100 people and displaced in excess of 150,000 followed years of droughts in northern Kenya and the Horn of Africa. As floods hit Kenya and Tanzania, countries in southern Africa, including Zambia and Zimbabwe, are battling droughts that are wrecking agricultural production. Before Banga took over at the World Bank, the institution was criticised for not doing enough on climate change.Ruto had called on wealthier nations “to meet us at this historic moment of solidarity” by increasing their IDA contribution from the $93bn in 2021 to $120bn in 2024. The G20 independent expert group has recommended tripling IDA’s financing capacity to $279bn by the end of the decade.Under Banga, the bank has expanded its mission “to create a world free from poverty — on a liveable planet”, setting a goal of increasing climate finance to 45 per cent of total lending by next year, at time when it has been expanding its footprint in Africa. Banga said “a large part of our money” was going to Africa, with the total amount raised from $5bn 15-20 years ago to $35bn-$40bn now.”The World Bank has had to contend with a number of recent scandals in Africa, including sexual abuse at a for-profit school chain in Kenya in which it held a stake until 2022, before Banga took over.Last month the Bank suspended new disbursements from a $150mn fund to expand a national park in Tanzania after it received allegations of killings, rapes and evictions.“I have zero tolerance for us not taking action once we know there’s a mistake,” Banga said. More