Aurelia Butler

Good morning. Firstly an apology: although you were divided about whether Australia’s nearest neighbour was Papua New Guinea, Timor, the Torres Strait or Indonesia, you all (rightly) were united in pointing out it certainly wasn’t New Zealand. I should have stuck with what I knew for sure, which is that the UK is much less remote than Australia. Hopefully, I will avoid further howlers in today’s note, on inflation and its political consequences.The 6.8% solutionThe good news: headline inflation has fallen to 6.8 per cent. The bad news: the headline fall masks that the underlying pressures driving up inflation have yet to ease in the UK.

I’m not going to opine on the economics, because the reality is I would just be paraphrasing Chris Giles and Lucy Fisher’s write-up. But I do have some thoughts on the politics.The first is that, in terms of how voters feel about their own situation, whether or not Rishi Sunak hits “his” target of getting the rate of inflation to halve by the end of the year is much ado about nothing. Most voters think that the target means something else entirely — not just falling inflation but very sharp deflation in the cost of goods, services, etc etc. That is not going to happen and as a result the government is going to continue to face a lot of voter anger over inflation.But the second is that the target matters a great deal, because, I think, if UK inflation hasn’t halved by the end of the year, it means the Conservative election campaign will face a constant drum beat from the broadcasters and most of the press about Sunak missing his targets. If he hits it, even if the other targets go awry, the mood music around the Tory campaign will be much better. In a sense, that’s ludicrous: the pledge was always a silly one, because the government does very little to directly shape it. Nonetheless, in terms of the politics of what is essentially going to be a very, very, very long election campaign, it matters a great deal.Now try thisI mostly listened to Tasmin Archer’s excellent 1992 record Great Expectations while filling in for Robert Shrimsley in today’s paper. (Fortunately, someone else is filling in for his funny slot: I am still getting angry letters about the last time.) Top stories todayWaiting-time targets | Health experts welcomed the UK government’s plan to cut cancer waiting-time targets but warned that the pledge had to be matched with resources.Data leak arrest | Police in Northern Ireland have arrested a man after the accidental data leak last week that identified the force’s entire 10,000 officers and staff.Spook countermeasures | UK arrests are part of wider western moves to disrupt Russian spy networks.Slipping standards | NHS capital investment cuts have left England’s hospitals crumbling.BAE aerospace deal | The UK’s largest defence company has agreed to buy the aerospace business of US conglomerate Ball Corp in a $5.6bn deal. More

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Beijing’s economic woes worsened last week after it emerged China had fallen into deflation. The news highlights how the country is struggling to live up to expectations of a strong recovery after emerging from extended Covid lockdowns. But will falling prices have an impact beyond China’s borders, in places where the bigger risk is still that an extended period of high inflation will endure? For now, economists say there is little reason for concern, as:Chinese deflation is likely to prove temporaryDeflation is primarily a concern when it is pervasive and caused by companies desperate to sell to consumers who are unwilling or unable to buy because they have fallen on hard times. This describes neither China’s economy nor its price movements. The economic recovery following the reopening has disappointed — the property sector remains a serious concern — but output is still growing and an expansion of close to 5 per cent this year is still on the cards. “China’s consumption recovery remains soft and uneven, but this a far cry from Japan-style deflation,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics, referring to the country’s decades-long experience with falling prices. While Chinese consumer prices fell 0.3 per cent in the year to July, a small fall in costs also occurred in 2021. Now as then, the deflation appears temporary — more the result of base effects than any deep problems.

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In July alone, prices rose by 0.2 per cent and they have increased 0.5 per cent in the first seven months of 2023. The measured deflation arose because prices — particularly of pork, which has fallen in price by 26 per cent over the past 12 months — did not rise at the pace seen during 2022, when China endured several major lockdowns. Neil Shearing, chief economist of Capital Economics, said the rise in core inflation — which excludes food and energy, and is seen as a better measure of underlying price pressures — from 0.4 per cent in June to 0.8 per cent in July demonstrated the lack of entrenched deflation in China. “To the extent that chronic demand weakness shows up in the inflation data, it will do so in the core numbers,” he said. Inflation is seldom as contagious as it seemsThe world — bar China — has appeared to suffer an inflation boom during the past couple of years. While the pace of price rises has been high in most countries, the reasons why differ markedly. Price rises triggered by snarl-ups in global supply chains may have been universal. But they were amplified in the US by extremely strong consumer demand growth. The surge in demand followed a huge fiscal expansion in 2020 and 2021, when the Trump and Biden administrations sent large cheques to households to combat the Covid-19 crisis.

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Strong demand was much less an issue in Europe and in emerging economies. These suffered much more from Russia’s invasion of Ukraine. In Europe, the pinch came from soaring natural gas prices. In poorer countries, higher food prices and energy costs sparked a wider rise in the price level.Paul Donovan, chief economist of UBS, said in the case of Chinese deflation, price pressures were as likely to prove “intensely local”.While the price of Chinese imports was likely to fall as a result of the country’s economic woes, Donovan noted that “an awful lot happens” to exports before they reach their final destination. “Generally most of the price of something made in China and sold in the US will be paid to US workers — in transport or advertising costs, and so on,” he said. Chinese deflation can help in Europe The big inflation problem, especially in Europe and emerging economies, has been the higher cost of imports, lowering living standards and sparking a process in which domestic companies try to defend their profit margins by raising prices and workers struggle to catch up. Chinese factory goods prices were 4.4 per cent lower in July than a year earlier. To a minor extent, this has an effect abroad. European countries will benefit from a weaker Chinese economy that places less competition on supplies of natural gas as it adjusts to weaning itself off from Russian supplies.It would be wrong, of course, to suggest that everyone else benefits (at least a little) from a weak Chinese economy.

China has contributed 40 per cent to global growth rates over the past 10 years, according to Dhaval Joshi, chief strategist at BCA Research. Any economic troubles in Beijing will weigh on world output. But at the moment, the fallout from Chinese deflation looks manageable both for the country itself and the rest of the world. More

TOKYO (Reuters) – About 40% of Japanese firms expect the central bank’s recent policy adjustment to have an impact on their fundraising, a Reuters survey showed, highlighting Japan Inc’s sensitivity to any changes in policy after years of massive easing.Signs the Bank of Japan may be gearing up to exit its ultra-loose monetary regime have raised the spectre of higher borrowing costs in the world’s third-largest economy, marking a potentially vast shift after decades of rock-bottom rates.Two-thirds of firms said that they would see an impact on their fundraising if long-term interest rates touched 1%, the level the central bank now allows 10-year bond yields to hit.”It will mean higher interest rates on our debt and lead to a deterioration in our cash flow,” one manager at an electronics firm said about the BOJ’s policy tweak.The Bank of Japan last month took steps to allow long-term interest rates to move more freely in line with increasing inflation and growth – even as it stuck to its yield curve control (YCC) targets that it uses to guide rates.”We expect capital investments in new businesses to be impacted,” a manager at a paper and pulp company wrote.The monthly Reuters Corporate Survey of 503 large and medium-sized non-financial Japanese firms, in which 256 responded, showed that 7% of firms expect an impact this financial year that ends in March. Another 34% see an impact on fundraising from the next financial year.The survey was conducted for Reuters by Nikkei Research on Aug. 1-10, after the central bank’s policy meeting in late July. Firms responded on condition of anonymity, allowing them to speak more freely.One manager at a company in the services sector said higher rates would put pressure on smaller rivals.”There will be a limited impact on our fundraising,” the manager said. “But we expect it to be more difficult for small and medium-sized companies in our industry to recover the capital they’ve invested, higher interest rates will weed them out, which works in our favour.”The survey also showed that despite fears of an economic slowdown in China, it remains a vital market for Japanese firms.Some 82% of respondents said they expected China to remain at least as important to their business in future as it is now.”We’re seeing fewer orders for production equipment as the slump in China has meant lower demand for capital expenditure,” said a manager at a machinery manufacturer.The downturn has particularly hit companies in the automotive supply chain. “Japanese cars are not selling in China,” said a manager at a textile manufacturing company.The fall in demand has coincided with greater pressure on costs for Japanese firms. One chemicals company was forced out of China altogether, saying it could no longer compete on price with firms there for dual-use goods – those that can be used for both civilian and military applications.To stay competitive in the Chinese market, about half of respondents said they planned to strengthen price negotiations with suppliers.Click here for a more detailed breakdown of the poll result. More