Aurelia Butler

Core inflation in the UK has begun to fall in the past two months, according to an official estimate based on a more sophisticated statistical analysis than used in the standard approach.In an article published on Monday, the Office for National Statistics said that when it looked at the common elements of inflation that existed across all the prices it measured, it found the underlying annual rate had dropped to 6.8 per cent in July, down from 7 per cent the previous month and 7.3 per cent in May.In contrast, last week’s official inflation data showed that the standard core measure fell from 7.1 per cent in May to 6.9 per cent in June and unexpectedly stuck there in July. Inflation in services, often quoted by the Bank of England as the best gauge of domestic price pressures was 7.4 per cent in May and in July with a small dip in June. The piece of research will give both the BoE and the government hope that inflation figures will not spring nasty surprises through the rest of this year.

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Unlike the normal approach for calculating core inflation, which simply excludes food, energy and alcoholic drinks from the overall measure, the new ONS methodology works out what it called the “common trend component” that shows the rate of price rises across all goods and services.This seeks to minimise the remaining volatile element for every measured item in the basket of goods and services. Some prices, such as petrol, diesel, gas and electricity tend to move independently from other goods and services, so have a high volatile component and low common component. Electrical goods, which have decreased in price over many decades, are equally seen to be poor predictors of underlying inflationary pressures. The ONS said the research suggested that restaurant prices were by far the best indicator of overall underlying inflation because they changed at the same time as the prices of most other goods and services either rose or fell. This means that the prices in McDonald’s, PizzaExpress or Nando’s have been “a good measure of the underlying trend in consumer prices inflation in the UK economy”, it added.Statisticians speculated that this trend resulted from restaurants reflecting rent, energy, food and labour costs, “so price movements often reflect the same broad shocks that impact the majority of items in the index”.

The value of restaurant prices in reflecting overall inflationary trends, has, however, decreased since the pandemic with prices rising faster than other goods and services.In the latest official figures, annual price rises for restaurants and cafés stood at 9 per cent in July, falling from 9.1 per cent in June and down from a peak inflation rate of 11.4 per cent in February. Month-on-month, prices in the sector rose 0.5 per cent in July, suggesting the underlying annual rate of restaurant inflation was 6.2 per cent, still three times the BoE’s 2 per cent inflation target. More

The recovery in the world’s second-largest economy has lost steam due to a worsening property slump, weak consumer spending and tumbling credit growth, adding to the case for authorities to release more policy stimulus.However, downward pressure on the yuan means Beijing has limited room for deeper monetary easing, analysts say, as a further widening of China’s yield differentials with other major economies could trigger yuan selloffs and capital flight.The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.45% from 3.55% previously, while the five-year LPR was left at 4.20%.In a Reuters poll of 35 market watchers, all participants predicted cuts to both rates. The 10 bp cut in the one-year rate was smaller than the 15 bp cut expected by most poll respondents.”Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the yuan,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management.”Chinese authorities care about currency market stability.”Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China cut both LPRs in June to boost the economy.The onshore yuan eased in early trade to 7.3078 per dollar, compared with the previous close of 7.2855, while benchmark Shanghai Composite index and the blue-chip CSI 300 index also declined.The yuan has lost nearly 6% against the dollar so far this year to become one of the worst performing Asian currencies.The reduction in the one-year LPR came after the People’s Bank of China (PBOC) unexpectedly lowered its medium-term policy rate last week.The medium-term lending facility (MLF) rate serves as a guide to the LPR and is widely read by markets as a precursor to future changes to the lending benchmarks.China’s central bank has also pledged to keep liquidity reasonably ample and its policy “precise and forceful” to support the economic recovery, amid rising headwinds, according to its second-quarter monetary policy implementation report.But the steady five-year tenor caught many traders and analysts off the guard, with some expecting the troubled property sector and rising default risks at some developers would have led to deeper cuts to the benchmarks.”We interpret the status quo of five-year LPR was a signal that the Chinese banks are reluctant to cut rates at the expense of rate differential margin,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.”It flagged a problem on the effectiveness of PBOC’s policy guidance pass-through into the market, and the Chinese authorities may be lacking effective tools to stimulate the property sector and economy via monetary easing.”Cheung added that the unexpected rate outcome should be “negative to China growth outlook and the yuan exchange rate”.The central bank said it will optimise credit policies for the property sector, while co-ordinating financial support to resolve local government debt problems, it said in a statement on Sunday. More

German producer prices have fallen more than expected, indicating that inflationary pressures are fast dissipating in Europe’s largest economy.The 6 per cent drop in prices charged by companies for goods rolling off the production line in the year to July is the fastest since 2009. It was driven mainly by sharp falls in wholesale energy prices, according to data from the federal statistical agency.Economists polled by Reuters had predicted a fall of 5.1 per cent. The month-on-month decline of 1.1 per cent was also larger than the 0.2 per cent fall they forecast. Oliver Rakau, an economist at consultancy Oxford Economics, said the data “offers further support to our view that there should be significant progress on the disinflationary front in the remainder of 2023 as lower producer prices feed through, especially to consumer energy and core goods prices with a lesser impact on core services”.About 40 per cent of German producer prices are now lower than the elevated levels reached last year. Energy producer prices dropped 19.3 per cent. Prices of intermediate goods, such as metals, wood and fertiliser, also fell year on year. But food producer prices rose 9.2 per cent, while prices of durable consumer goods, such as furniture and appliances, and capital goods, such as machinery, were also higher than a year ago. The European Central Bank’s governing council is looking for signs of whether its unprecedented increase in interest rates to a 22-year high has done enough to bring consumer price inflation down from its highest level for a generation back to its 2 per cent target.The first fall in German producer prices since October 2020 would “add weight to the arguments by those in the ECB council that favour a pause or at least a skip at the September meeting as inflation worries ease and growth concerns strengthen”, Rakau said.However, like many economists, he predicted the ECB would still raise its benchmark deposit rate again to 4 per cent at its next policy meeting on September 14, “given the labour market and services inflation resilience and wage dynamics”.Goldman Sachs said in a note to clients on Monday that it expected annual core eurozone inflation — which strips out volatile energy and food prices — to remain above 5 per cent until September and to only fall to 4 per cent by the end of the year as high growth in services prices partly offsets falling goods prices.Eurozone wages have been rising almost 5 per cent year on year, according to Eurostat, the EU statistics office. This should help wage growth to turn positive in real terms again this year, as headline inflation continues to fall, giving a boost to consumer spending power along with government support that could keep price pressures elevated. Piet Haines Christiansen, director of fixed income research at Danske Bank, said the fall in German producer prices was “an important prerequisite for getting inflation quicker in line with target”. But he added: “If consumer activity is still decent, inflation will not fall as much and quickly as needed.” More

For fear of chucking rocks in glass houses (ca half of Alphaville is on the wrong side of 40), here is an NBER working paper to back up our headline (which is just a blunt version of the “demographics is destiny” cliché).Alphaville’s emphasis below:Population growth and age structure change dramatically as countries transition from high to low rates of mortality and fertility. These changes present an opportunity for societies to substantially raise living standards. Initially, mortality declines faster than fertility, producing a bulge of young dependents that tends to depress economic growth. However, once fertility decline accelerates and this bulge of young people progresses into working ages, economic growth can take off. The growing ratio of working-age people in the total population raises labor input; promotes productivity; and frees resources for saving, educational attainment, and innovation. Bloom et al. (2003) label this growth take-off the demographic dividend. Countries harness it if they create a socioeconomic environment that beneficially employs their labor potential. The dividend dissipates once countries complete the demographic transition. However, as fertility remains below long-run replacement rates in many countries and large cohorts progress to older ages, population age structures fail to stabilize in the foreseeable future. This threatens to turn the demographic dividend into a demographic drag.This is obviously not a new idea, but the paper — authored by Rainer Kotschy and David Bloom of Harvard and published by the National Bureau if Economic Research this week — tries to put some meat on the bone of that last point.They first examined the demographics and economic growth rates of 145 countries in five-year intervals between 1950 and 2015, and used those observations to estimate the impact of ageing populations over the next three decades.Kotschy and Bloom used two methods. One was a simple, traditional “retrospective” model which uses existing uniform classifications of old age across generations. They also used a “prospective” approach, to take into account that people today are mentally and physically able to work for longer than they were before. In other words, a 60 year old in 1950 (who had lived through two world wars, a depression, the Spanish flu, and generally a lot of unpleasantness) was less likely to live as long and be able to work as long as a 60 year old today. And thus:We combine the empirical estimates with demographic predictions and project economic growth in 2020—2050. These projections show that future growth depends not only on how population age structures change as cohorts pass through the age distribution but also on how labor potential changes with improvements in functional capacity as longevity rises. Contractions in working-age shares will slow growth; however, gains in functional capacity thanks to higher life expectancy can cushion perhaps half of this slowdown. Without population aging, income per capita in OECD countries is projected to grow on average by 2.5 percent annually between 2020 and 2050. With population aging, growth is projected to slow by 0.8 percentage points if we measure work in gages retrospectively but only by 0.4 percentage points if we measure working ages prospectively. These values define bounds for the average demographic drag across OECD countries with and without the potential gains from expansions in labor supply due to improved functional capacities. Whether or not these gains can be realized depends on labor markets and institutions. In contrast, population aging is projected to spur average growth of income per capita in non-OECD countries.Those may seem like small growth differences, but compounded over three decades the impact is meaningful. Going by the OECD’s $38,341 per-capita GDP in 2020 and extrapolating the no-ageing, retrospective and prospective scenarios, Alphaville’s very rough calculations show that the rich world will be $8,900 worse off per capita by 2050 than we would be if demographics stayed constant, even with the more optimistic prospective model.Or in chart form: It’s a Monday in August so take this with a pinch of salt, but Alphaville’s back-of-the-envelope calculations indicate that the OECD’s overall gross domestic product will be at least $12tn smaller in 2050 in the prospective scenario, and $23tn smaller in the gloomier retrospective one.On a completely unrelated note, here is an old Calvin & Hobbes strip. More

The US acted aggressively last year to limit China’s ability to develop artificial intelligence for military purposes, blocking the sale there of the most advanced US chips used to train AI systems.Big advances in the chips used to develop generative AI have meant that the latest US technology on sale in China is more powerful than anything available before. That is despite the fact that the chips have been deliberately hobbled for the Chinese market to limit their capabilities, making them less effective than products available elsewhere in the world.The result has been soaring Chinese orders for the latest advanced US processors. China’s leading internet companies have placed orders for $5bn worth of chips from Nvidia, whose graphical processing units have become the workhorse for training large AI models. The impact of soaring global demand for Nvidia’s products is likely to underpin the chipmaker’s second-quarter financial results due to be announced on Wednesday.Besides reflecting demand for improved chips to train the internet companies’ latest large language models, the rush has also been prompted by worries that the US might tighten its export controls further, making even these limited products unavailable in future.However, Bill Dally, Nvidia’s chief scientist, suggested that the US export controls would have greater impact in future. “As training requirements [for the most advanced AI systems] continue to double every six to 12 months,” the gap between chips sold in China and those available in the rest of the world “will grow quickly,” he said.Capping processing speedsLast year’s US export controls on chips were part of a package that included preventing Chinese customers from buying the equipment needed to make advanced chips. Washington set a cap on the maximum processing speed of chips that could be sold in China, as well as the rate at which the chips can transfer data — a critical factor when it comes to training large AI models, a data-intensive job that requires connecting large numbers of chips together.Nvidia responded by cutting the data transfer rate on its A100 processors, at the time its top-of-the-line GPUs, creating a new product for China called the A800 that satisfied the export controls. This year, it has followed with data transfer limits on its H100, a new and far more powerful processor that was specially designed to train large language models, creating a version called the H800 for the Chinese market.The chipmaker has not disclosed the technical capabilities of the made-for-China processors, but computer makers have been open about the details. Lenovo, for instance, advertises servers containing H800 chips that it says are identical in every way to H100s sold elsewhere in the world, except that they have a transfer rate of only 400 gigabytes per second.That is below the 600 GB/s limit the US has set for chip exports to China. By comparison, Nvidia has said its H100, which it began shipping to customers earlier this year, has a transfer rate of 900 GB/s. The lower transfer rate in China means that users of the chips there face longer training times for their AI systems than Nvidia’s customers elsewhere in the world — an important limitation as the models have grown in size.The longer training times raise costs since chips will need to consume more power, one of the biggest expenses with large models. However, even with these limits, the H800 chips on sale in China are more powerful than anything available anywhere else before this year, leading to the huge demand. The H800 chips are five times faster than the A100 chips that had been Nvidia’s most powerful GPUs, according to Patrick Moorhead, a US chip analyst at Moor Insights & Strategy.China’s leading internet companies have placed orders for $5bn worth of chips from Nvidia © SOPA Images/LightRocket via Getty ImagesThat means that Chinese internet companies that trained their AI models using top-of-the-line chips bought before the US export controls can still expect big improvements by buying the latest semiconductors, he said.“It appears the US government wants to not shut down China’s AI effort, but make it harder,” said Moorhead. Cost-benefitMany Chinese tech companies are still at the stage of pre-training large language models, which burns a lot of performance from individual GPU chips and demands a high degree of data transfer capability. Only Nvidia’s chips can provide the efficiency needed for pre-training, say Chinese AI engineers. The individual chip performance of the 800 series, despite the weakened transfer speeds, is still ahead of others on the market. “Nvidia’s GPUs may seem expensive but are, in fact, the most cost-effective option,” said one AI engineer at a leading Chinese internet company.

Other GPU vendors quoted lower prices with more timely service, the engineer said, but the company judged that the training and development costs would rack up and that it would have the extra burden of uncertainty.Nvidia’s offering includes the software ecosystem, with its computing platform Compute Unified Device Architecture, or Cuda, that it set up in 2006 and that has become part of the AI infrastructure.Industry analysts believe that Chinese companies may soon face limitations in the speed of interconnections between the 800-series chips. This could hinder their ability to deal with the increasing amount of data required for AI training and they will be hampered as they delve deeper into researching and developing large language models.Charlie Chai, a Shanghai-based analyst at 86Research, compared the situation with building many factories with congested motorways between them. Even companies that can accommodate the weakened chips might face problems within the next two or three years, he added. More

LOS ANGELES/HOUSTON (Reuters) – Before the Ever Max ship carrying lava lamps, sofas, Halloween costumes and artificial Christmas trees could make its inaugural Panama Canal voyage this month, a historic drought forced it to drop weight by offloading hundreds of containers.Weather-related disruptions denied the vessel, owned by Taiwanese shipping company Evergreen Marine, a chance on Aug. 1 to set a record for carrying the most containers through the vital maritime shortcut that connects the Pacific and Atlantic oceans.The Panama Canal Authority has reduced maximum ship weights and daily ship crossings in a bid to conserve water. Maritime transportation experts fear such events could become the new normal as rainfall deficits in the world’s fifth-wettest country spotlight climate risks affecting the ocean shipping industry that moves 80% of global trade.Ship owners have the options of carrying less cargo, shifting to alternate routes that can add thousands of miles to the trip or grappling with queues that earlier this month backed up 160 vessels and delayed some ships by as much as 21 days. The restrictions already are sending China-U.S. spot shipping prices up as much as 36% amid soaring sea temperatures that climate scientists warn could supercharge extreme weather. “You have to wave a caution flag because the temperatures are so far above normal,” said Drew Lerner, founder and senior agriculture meteorologist at World Weather, whose customers include global commodity traders.Canal operators are on a tightrope as they work to manage maritime trade disruption and prepare for what is shaping up to be an even drier period next year, said Peter Sand, chief analyst at air and ocean freight rate benchmarking platform Xeneta. More than 14,000 ships crossed the canal in 2022. Container ships are the most common users of the Panama Canal and transport more than 40% of consumer goods traded between Northeast Asia and the U.S. East Coast. U.S-bound vessels caught in the bottlenecks have carried Barbie dolls, auto parts, BYD (SZ:002594) solar panels, water treatment equipment, diabetes testing kits and other goods, according to data from Steve Ferreira, CEO of a company that audits ocean shipping bills.Restrictions at the canal started earlier this year, affecting about 170 countries and virtually every type of good – including soybeans and liquefied natural gas from the United States, copper and fresh cherries from Chile, and beef from Brazil. Bulk carriers that transport commodities from corn to iron ore, as well as tankers that move oil, fuel, gas and chemicals also are affected. Some energy companies are rerouting vessels laden with coal and liquefied natural gas to the Suez Canal.WATER WATCH A naturally occurring El Nino climate pattern associated with warmer-than-usual water in the central and eastern tropical Pacific Ocean is contributing to Panama’s drought. The area around the canal is experiencing one of the two driest years in the country’s 143 years of keeping records, data from the canal authority and the Smithsonian Tropical Research Institute (STRI) showed. Rainfall measurements around the area are 30-50% below normal. Water levels in Gatun Lake, the rainfall-fed principal reservoir that floats ships through the Panama Canal’s lock system, have remained below normal despite accumulation from the current rainy season. A potential early start to Panama’s dry season and hotter-than-average temperatures typical of major El Nino events in the country could increase evaporation from Gatun Lake and result in near-record low water levels by March or April 2024, said STRI’s Steven Paton.”It’s the perfect storm of events,” said Paton, who has monitored rain patterns in the Central American country for more than three decades.The frequency of major El Nino drying patterns has risen significantly during the last 25 years of the canal’s 109-year history. If that continues, “it will be increasingly difficult for (the Panama Canal) to guarantee that the largest ships are going to be able to get through,” Paton said. BRACING FOR MORE CUTSCanal operators have lowered ship weight limits to accommodate lower water depth – posing a problem for large vessels like the Ever Max.The ship was built to carry more than 8,650 40-foot (12-metre) cargo boxes. It arrived at the Pacific side of the canal over the limit even though it was only carrying the equivalent of 7,373 containers. The vessel unloaded about 700 containers onto trains, retrieved them on the Atlantic side and continued on to the U.S. East Coast, according to the Canal Authority and Eikon vessel tracking. Ship owner Evergreen Marine declined comment. Canal operators also cut the number of daily ship crossings to 32 from about 36 during normal operations since each passage requires about 50 million gallons of water, only a portion of which is recycled.Some shipping executives are bracing for more reductions later this year, noting that in 2020 a less severe drought prompted canal operators to reduce crossings to 27 per day.”Anyone shipping product around the world should be paying attention to possible disruptions due to climate change,” said Brian Bourke, global chief commercial officer at SEKO Logistics. “The Panama Canal is just the latest example.” More

When I published a bullish book about Asia in 2016, I felt I had good answers to all the sceptical questions except one. What about China’s demography? The cliché was that China will “grow old before it grows rich”. Like many clichés, it turns out to have some truth to it. For all the talk in Beijing of a unique “China model”, the country’s economic history bears a striking resemblance to the trajectories of Japan and South Korea. The take-off phase is driven by rapid, export-led industrialisation and low-cost labour. The slowdown is closely linked with the ageing and shrinking of the population.There is a plethora of western commentary about the risks of the “Japanification” of China’s economy — in particular, deflation, property market bubbles and a debt crisis. But the social parallels with Japan and South Korea should also worry China. All three suffer from very low fertility rates, leading to a shrinking and ageing population that adds to the strains on the economy. China’s “one child policy” — adopted in 1980 and abandoned in 2016 — accelerated the onset of an ageing society. But Japan and South Korea also hit the demographic wall without official intervention. South Korea now has the lowest fertility rate in the world, with the average woman having just 0.78 children. The 1997-98 Asian financial crisis, which cast a shadow over the prospects of many young people, seems to have been a turning point, making them even more reluctant to have children. Japan, South Korea and China all have hyper-competitive exam-driven education systems. As opportunities narrow, an increasing number of young people are tempted to opt out of the rat race. In Japan, a recent government study found that 1.5mn people, or more than 1 per cent of the adult population, have withdrawn from society altogether and almost never leave their homes. The problems of these hikikomorioften started with feelings of failure and unbearable social pressure in young adulthood.Some of that will sound disturbingly familiar to the Beijing authorities. As China wrestles with a slowing economy and youth unemployment of more than 20 per cent, a growing number of young people are giving up on the race for a diminishing number of rewarding jobs and instead opting to “lie flat”.Japan’s population began to decline in 2011 and South Korea’s in 2020. Last year it was China’s turn to record its first population decline in 60 years. Worryingly for the Chinese authorities, their population slide has begun at a lower level of average wealth than in their East Asian neighbours.The Chinese government is now desperately trying to boost the birth rate. But the experiences of Japan and South Korea show how hard that will be. In fact, China’s demographic situation could get worse, since young people who cannot find jobs or afford a flat are even less likely to start a family.In an effort to ease the pressure on Chinese youngsters and to reduce the cost of raising children, President Xi Jinping severely restricted the private tutoring industry in 2021. But this had the perverse effect of damaging one of the largest sources of employment for young graduates.Last week, the Chinese government came up with a new response to the problem of rising youth unemployment. It decided to stop publishing the figures. That step underlines a crucial difference between China and its main East Asian neighbours. Japan and South Korea are established democracies. But China’s slowdown will take place in a giant one-party state with sound historical reasons to worry about discontent among the young.Student demonstrations rocked China in 1919 and 1989, when they were brutally suppressed. Students were at the heart of the Hong Kong protests of 2019-20, which were also crushed. It was street demonstrations by the young that persuaded Beijing to abandon its “zero-Covid” policies last year.China’s surveillance state almost certainly has the means to contain student agitation and protest movements. But democracies, such as South Korea and Japan, have more safety valves for dealing with social discontents and more latitude for political experimentation. In 2017, South Korea’s President Park Geun-hye was impeached and removed from office. She was later given a long prison sentence for corruption. In the 20 years after the bursting of its financial bubble in 1989, Japan cycled through 14 prime ministers. China’s paranoid one-party system does not have that flexibility. Xi’s encouragement of a cult of personality — and his triumphalist rhetoric about the “great rejuvenation of the Chinese people” — will make open public debate about the country’s complex social and economic challenges all but impossible.Xi’s own instincts are to elevate national security and political control above economic growth. His efforts to speak to the rising generation also sound increasingly out of touch. The suggestion that discouraged youngsters should “eat bitterness” is unhelpful. His nostalgia for the character-strengthening glories of the Cultural Revolution are likely to seem irrelevant to those born into an entirely different China. Despite their problems, Japan and South Korea have remained stable and prosperous countries. China may find that its own transition to an ageing and slower growing society is considerably more difficult and [email protected] More