Aurelia Butler

Good news has strange effects. After just two months of encouraging US price developments, there is much talk about the death of inflation and the lessons to be learnt. Financial markets are betting on a soft landing of lower inflation without recession. Economists speak of “immaculate disinflation”. Some go further, projecting US success in beating inflation will apply everywhere. There are even mutterings that inflation was, after all, transitory and that the seemingly painless decline in US CPI inflation should force a fundamental rethink of economic theory. It has been hot in many parts of the world, but people are getting a little overexcited. Some facts are needed to frame the debate. Falling US CPI inflation from a peak of over 9 per cent to 3.2 per cent in July this year cannot mask the huge overshoot of prices compared with targets. Over the past two years, this headline measure of US inflation has risen 12 per cent — an annual rate roughly three times faster than the 2 per cent the Federal Reserve desires. In the eurozone and the UK the increases over the past two years have been even higher, at 14.6 per cent and 17.6 per cent respectively. At a minimum we have had almost six years of expected inflation in just a couple. Prices are rising slower, but they are not falling back.Everyone expected much of the rise in prices after the dislocations of the pandemic and Russia’s invasion of Ukraine to be temporary. The worry was always that inflation would not fall all the way to the 2 per cent targets on its own and could become quite sticky on the way down. That is exactly what is happening and still the concern. Even after the latest good data, the Fed’s inflation forecasts for the end of this year, next year and the one after are unlikely to improve much. All the main errors have been in underestimating inflation’s strength and persistence rather than overestimating it.

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Despite the sharp fall in the headline rate, the US economy still appears to be running hot and the labour market has not yet come back into balance. As members of the Federal Open Market Committee acutely observed at their latest meeting, “nominal wages were still rising at rates above levels assessed to be consistent with the sustained achievement of the committee’s 2 per cent inflation objective”. If the US has seen some encouraging trends without sufficient progress, Europe has not yet followed. The European Central Bank had to raise its forecasts of inflation in its latest predictions and measures of core inflation have become sticky. And while it is possible for UK statisticians to construct measures showing underlying inflation beginning to fall, most data points still indicate a post-Brexit entrenched wage price spiral. Definitions of price stability do not include services inflation still running at 7.4 per cent in July, with annual wage growth over 8 per cent. This is not the environment in which it makes sense for European central banks to declare victory over inflation. The central banks have, of course, become active inflation fighters over the past 18 months. A 5.25 percentage point rise in borrowing costs in the US, 5.15 percentage points in the UK and 4.25 percentage points in the eurozone are cooling labour markets, with vacancies falling and unemployment rising in some countries. Much of their effects is still to be felt. The facts do not suggest there need to be many more interest rate increases to defeat inflation. But with underlying inflation still too high on both sides of the Atlantic, there is almost no coherent case to be made that the vast majority of this monetary tightening was ill-conceived. We cannot know how the major Atlantic economies would have fared had central bankers done nothing, but there is little doubt that excess demand would be stronger, inflation higher and the problem of persistent price rises would be worse. The steps they took to contain inflation were therefore almost certainly necessary and there is little case yet to shout mission accomplished. But one aspect of the fight against inflation has surprised almost everyone — its lack of pain. Unemployment in the US is touching record lows and has barely risen in Europe. The jobs market has defied expectations in a good way as interest rates have risen. Tempting as it might be to say that disinflation can therefore always be painless and we need to rewrite the economics textbooks, this appears to be a case of special post-pandemic circumstances rather than a theory-defying episode. During and after the pandemic, the world suffered many supply-side shocks that contributed to the initial rise in prices. These occurred globally in gummed up and less efficient supply chains, in catastrophic rises in wholesale gas prices in Europe last year and in declines in US and UK labour force participation. Many of these have been fixed or ameliorated, helping to bring down inflation with less pain than normal. This is far from bad news for economics because theories of price are always determined by both supply and demand. Supply has improved, demand has been held in check with tighter monetary policy. It is far too early to be mulling the future of macroeconomic theory. The question now for the US and elsewhere is whether interest rates are roughly right or need to be edged a little higher. [email protected] More

As the joke goes, nice Brics, but where’s the mortar? What idea or strategic interest holds together the five non-western nations that are convening in South Africa this week, never mind the score or so others that aspire to join them?The reported list encompasses democracies (India), autocracies (China), secular states (Brazil), quite the opposite (Saudi Arabia), the rich (the United Arab Emirates), the poor (Ethiopia), former empires (Russia) and former colonies (Algeria). The first two of those have been known to exchange lethal fire with each other along the Himalayan frontier from time to time. The largest territorial entities, Russia and China, fell out during the cold war over the proper interpretation of Marxist scripture.Who, in all seriousness, expects such a constellation of states to ever cohere into something that deserves the name of “bloc”? And what, after 15 official summits of this movement, is its worldview? As out of favour as the Washington consensus has become, not least in Washington, it is at least an identifiable programme. What is the Brics or global south alternative? If it is one that is much less keen on open trade, where does China, the world’s number one exporter, stand on that question? No, if there is one adhesive that binds the various nations of the Brics, it is grievance: against western primacy, against past slights. And while grievance isn’t enough, it is an underrated force in politics and life.With due respect to the physicists working on nuclear fusion, the most powerful source of energy in the universe, if it could ever be harnessed, is human resentment. Nietzsche thought it made the world go round. (And he didn’t even live to see what it would drive his fellow Germans to do after their defeat in the Great War.) There is no understanding modern Russia without a sense of its ressentiment as a shrunken empire. If we narrow the lens from the geopolitical to the personal, we see resentment at work even more. Notice how many populist leaders are what might be called relative outsiders. Privileged by almost all standards, these people feel shut out of what they regard as the true in-crowd. Nigel Farage: a former stockbroker, but also a non-graduate and much-mocked seven-time loser of elections to parliament. Boris Johnson: Etonian and Oxonian but neither posh nor rich. Marine Le Pen: a dynast, but not one who passed through France’s top school for technocrats. And then the ultimate case in point: Donald Trump, an outer-borough arriviste, ridiculed by the smart set for his ghastly taste and paprika tan.This pattern goes at least as far back as Richard Nixon, another butt of hurtful jokes in a country with more class sensitivities than it pretends. As a student, he so resented the social elite among his peers that he founded his own fraternity for outsiders and also-rans. (A sort of Brics on campus.) What animates the populist right is not so much an ideological programme. It is what the British would call chippiness, directed at a real or imagined beau monde.On the face of it, no two entities are less alike than Trump and China. The one declared commercial war on the other, and in so doing changed the course of the 21st century. But just as the same laws of motion act on an apple as on a planet, the same emotion can propel a man and a nation state. In this case, it is wounded amour propre. No emotion is harder for western elites to fathom, as they have had so little cause to feel it.Resentment is not the same thing as hatred. The hater wants nothing at all to do with the object of their hate. (Think of al-Qaeda’s attitude to the west.) The resenter, in contrast, is half-curious about the thing being resented. Farage is a man who plainly aches for the recognition of the establishment that he nevertheless torments. Brics elites, and not just Russian ones, make extensive use of London, the Côte d’Azur, the Franco-Italian luxury goods sector and American universities. To judge by global surveys on the war in Ukraine, much of the world sees the west as arrogant and hypocritical. It is also where much of the world wants to migrate.Even the origin of the Brics concept gives away this conflicted attitude towards the west. All that summitry in South Africa, all that counter-G7 brainstorming, and where does the movement get its label? A British economist at an American bank with that classic global south name, Jim O’[email protected] More