Aurelia Butler

Chancellor Jeremy Hunt is to scrutinise profits in the food industry supply chain as part of a series of steps agreed with UK regulators to try to help households and squeeze high inflation.Much of the “action plan” agreed by Hunt with watchdogs on Wednesday covers work that was already under way to protect consumers, although the chancellor said the regulators had agreed to “work at pace”.But the Treasury announced Bank of England governor Andrew Bailey was carrying out work to address “high food inflation”, including looking at profit margins for companies in the supply chain.There have been growing expectations at Westminster that Hunt might take action to contain food inflation, which stood at 14.6 per cent in June, according to the British Retail Consortium, a trade body.But the government has ruled out imposing price caps and one government official said ministers were not considering a “margin cap” on food companies.The Treasury said the BoE’s role would be about monitoring what was driving food prices, and working with the Competition and Markets Authority, which has powers to tackle any evidence of profiteering.The BoE said it would be holding meetings with businesses in the sector and draw on CMA data, with analysis included in the central bank’s August monetary policy report. The BoE does not believe so-called “greedflation” has played any significant role in the surge in food prices. Several members of the BoE Monetary Policy Committee have said it might simply take time for lower producer prices to feed through to the retail prices paid by consumers.Bailey told a central banking conference on Wednesday that one reason retail prices for food did not yet reflect falls in global prices for raw materials was that manufacturers were locked into long-term contracts.Hunt’s “action plan” to tackle high prices was agreed with five leading regulators — the CMA, the Financial Conduct Authority, plus the telecoms, energy and water watchdogs — after talks at 11 Downing Street.Areas targeted by regulators for action include the interest rates paid by banks to savers, as well as fuel prices and grocery bills.Other issues discussed during Hunt’s one-hour meeting with the watchdogs were support for households struggling to pay water bills, broadband and mobile prices, and companies’ energy bills.The FCA said it would publish a report by the end of July on whether savers are fully benefiting from rises in interest rates.“We will require the largest banks and building societies to explain the pace and extent of their pass through of interest rates, and how they are proactively supporting customers to switch to high interest rate products that might be suitable,” said the financial regulator.Labour has accused Hunt of not doing enough to help consumers, but the chancellor said: “I’m pleased we’ve secured agreement with the regulators to act urgently in areas where consumers need most support to ensure they are treated fairly.”Hunt and Rishi Sunak, prime minister, have been under mounting pressure to be seen to be taking action to tackle the cost of living crisis, but they are heavily constrained by economics and politics.Hunt’s allies talk of “siren voices from across the political spectrum” calling for more government support for households. Conservative, Labour and Liberal Democrat MPs have called for help for struggling mortgage holders.

The chancellor has rejected those demands as likely to fuel inflation. The government also ruled out a price cap on basic food or other price controls: a policy from which Tories recoil on economic and political grounds.Hunt has instead decided to show he is responding to the crisis by leaning on regulators and companies to help hard-pressed consumers.Lord Andrew Tyrie, former CMA chair, was sceptical about whether calling in the regulators would have much effect. “It might make a difference at the margins, by a small amount,” he said. “But the problem of inflation is macroeconomic primarily. Interest rates were kept too low for too long.”Hunt was clear that he does not want to give regulators new powers, nor does he want to be seen to be telling them how to do their job. Instead the chancellor has tried to apply pressure on regulators to explain what is happening in their markets, speed up existing work on competition issues and to provide them with what his allies call “political cover”. More

The world’s top central bank chiefs signalled their readiness to increase interest rates further and keep them high, as they warned tight labour markets are still pushing up wages and prices.The heads of the US Federal Reserve, the European Central Bank and the Bank of England warned at a conference in Sintra, Portugal, that more action may be needed to bring inflation down towards targets of about 2 per cent despite some economists’ predictions that further rate rises could trigger a recession or financial crisis.“Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” Fed chair Jay Powell told the much-watched central bankers’ conference.“The labour market is really pulling the economy,” he added, signalling the Fed could increase interest rates at its next two meetings after pausing this month.The futures market was pricing in a 79 per cent probability of a July rate rise by the US central bank, up from 74 per cent before Powell spoke.Frederik Ducrozet, an economist at Pictet Wealth Management, said the bankers “seem ready to tolerate a mild recession if that’s the price to pay” to hit their targets.However, IMF deputy director Gita Gopinath warned the conference that central banks may need to sacrifice their fight against inflation if higher rates triggered a systemic financial crisis.Investors expect the Fed, the ECB and the Bank of England to increase their policy rates a couple more times in the coming months, particularly as economic growth has remained relatively resilient, labour markets are still very tight and wages are rising rapidly.Inflation has been falling in the US and in the eurozone, but excluding energy and food prices it has been slower to decline. Powell said that while goods and housing prices had fallen, the Fed still had not seen “any real improvement” in the labour-intensive services sector.The Fed chair added he still did not think a recession would be required to bring labour supply and demand into balance. “Wage pressures are still high but they are definitely coming down,” he said, noting there were still 1.7 vacancies for every unemployed person in the US.BoE governor Andrew Bailey said there could be “very big jumps down” in headline inflation in the coming months. But he added the core inflation rate — excluding energy and food — was “much stickier” and the UK’s shrunken labour force due to people stopping working since the coronavirus pandemic meant high wage growth could keep price pressures elevated.

Even Bank of Japan governor Kazuo Ueda said the growth of wages and prices were picking up in his country, after decades of near stagnation, allowing officials to start considering the prospect of abandoning its ultra-loose monetary policy.“Wages have started to rise at 2 per cent or so for the first time in more than three decades — we are starting to see changes in inflation expectations and changes in wage-setting behaviour,” said Ueda, who took charge of the BoJ earlier this year. “This is a good sign.”Christine Lagarde, president of the ECB, which hosted the conference, said her institution was “not seeing enough tangible evidence of underlying inflation — particularly domestic prices — stabilising and moving down”.Eurozone inflation is 6.1 per cent, compared with 4 per cent in the US and 8.7 per cent in the UK. More

Today’s top storiesUK government ministers are on standby for the collapse of Thames Water, the country’s biggest water utility, and considering options that include the temporary nationalisation of the debt-laden business. Chief executive Sarah Bentley stepped down yesterday.Ukraine’s defence minister Oleksiy Reznikov told the FT that the “main event” in its counteroffensive against the Russian invasion was yet to come. Here’s our new explainer on why the EU is split over raiding Russian assets, a move fraught with legal and financial hurdles. Germany suffered an “alarming” decline in its attractiveness for business investment last year, when €125bn flowed out of the country in foreign direct investment, according to a leading economic institute.For up-to-the-minute news updates, visit our live blogGood evening.Are airlines using the surge in demand for flights to jack up ticket prices? And how is the aerospace industry coping with the need for more — and greener — aircraft to satisfy our post-pandemic yearning to take to the skies?As we report today, Olivier Jankovec, director-general of airport trade body ACI Europe, has urged regulators to look at fares — which have risen 30 per cent year on year — for evidence of price gouging. The claim is rejected by airlines, which blame airports for increasing charges. The battle has been particularly fierce at London Heathrow, where carriers including British Airways and Virgin Atlantic led a successful campaign to stop it raising its fees by 90 per cent following the pandemic.The renewed demand for flying since restrictions were lifted was reflected in a slew of deals at the Paris air show last week — the first in four years — including the largest single jet deal in civil aviation history: Indian carrier IndiGo’s order for 500 aircraft from Airbus. The head of French jet engine maker Safran told the FT earlier this month of an “unprecedented crisis of supply” in the aerospace industry, which would likely stretch into next year as manufacturers struggle to source the parts and staff they need to keep up with increased demand. Airbus made a similar point last month, pointing to shortages in components, semiconductors, labour and even seats. Engine maker Rolls-Royce was more bullish, noting that recovery in demand for large long-haul aircraft, its key market, was “coming back strongly”.Airlines are reorganising to cope. In Latin America a flurry of business tie-ups and new routes has been accompanied by billions of dollars from investors. The region last year ranked first for passenger recovery and is now virtually back to pre-pandemic rates, boosted by “revenge tourism” — holidaymakers seeking escape following the confinement of social distancing. And unlike in Europe and North America, the region’s carriers have had to survive without targeted state financial assistance.Sustainability, alongside the rush to increase defence budgets after Russia’s invasion of Ukraine, was another hot topic at the Paris show. The aviation industry has committed to achieving net zero carbon emissions by 2050 via new technologies including sustainable aviation fuels (SAF) and green hydrogen. Environmental groups however maintain that a credible path to net zero is not compatible with an industry that is set on expansion. “If you want to solve a problem, start by not making it worse,” said Carlos Lopez de la Osa, of Transport & Environment, a clean transport campaign group. “If the sector keeps growing, sustainable flying will remain a pipe dream. It’s simple maths: more planes in the sky means more SAF required.”Need to know: UK and Europe economyChancellor Jeremy Hunt discussed the UK cost of living crisis with regulators, asking whether there was any evidence of price gouging by companies. Supermarkets yesterday backed greater transparency on fuel prices but denied profiteering from food inflation. New data suggested the growth in food prices was slowing.The situation for mortgage holders however remains bleak. Hunt also demanded banks do more to reward savers.A UK-EU deal on financial services regulation was finally signed in a fresh sign of improving relations between the two sides since problems over Northern Ireland’s post-Brexit trading arrangements were resolved in February. Manufacturers though are less happy: Brexit is undermining their place in EU supply chains. Gibraltarians too: their post-Brexit trading deal is at risk from a power struggle in Spain.The EU rebuffed a proposed US solution to end tariffs on steel and aluminium, heightening fears of a renewed trade dispute. The two sides paused a tariff war over measures imposed by then US president Donald Trump in 2021 but must find a binding deal on a new “green steel” club by October.European Central Bank chief Christine Lagarde reiterated the need for high interest rates to fight off a wage-price spiral. Italian prime minister Giorgia Meloni was not impressed. Bank of England governor Andrew Bailey likewise signalled UK interest rates were likely to stay higher for longer than financial markets were expecting.Need to know: Global economyUS president Joe Biden is making a new push to sell his economic vision to voters as the effects of his industrial policies start to filter through and inflation eases. US foreign policy is the theme of Martin Wolf’s new column: Is America feeling buyer’s remorse at the world it built?China’s premier Li Qiang hit out at the west’s “de-risking” drive, denouncing economic “politicisation” and defending globalisation in an address to the World Economic Forum. Deputy head of the IMF Gita Gopinath said central banks had to accept the “uncomfortable truth” of inflation staying above their 2 per cent target if they were to avoid a financial crisis.The new head of the Democratic Republic of Congo’s state mining company said the country had missed the chance to leverage its dominance in the cobalt market and attract investment. Indonesia’s sudden emergence as a rival supplier has also threatened DRC’s position.The World Bank said an extra 4mn Nigerians were pushed into poverty in the first five months of this year as African’s largest economy was hit by soaring inflation.Need to know: businessCyber security experts warned about the growth of deepfake scams where criminals pair artificial intelligence software with personal information to create digital likenesses of people to bypass traditional security checks.KPMG is shedding 5 per cent of its US workforce in another sign of the slowdown in demand for consulting and other services. EY, Deloitte, McKinsey and Accenture are also cutting back. PwC told its UK staff to expect smaller pay rises and bonuses.Hosts of Chinese companies are pivoting to the manufacture of lithium batteries, sparked by the government’s plan for energy independence. India is set to offer billions of dollars in subsidies for companies making electricity grid batteries as it tries to speed up its transition from coal.A Big Read discusses the role of Macquarie, the Australian group that has become the world’s largest infrastructure manager but prefers to downplay its influence.A new series of the Tech Tonic podcast focuses on social media, beginning with Twitter. Will Elon Musk save it or destroy it?The World of Work Goldman Sachs and Morgan Stanley are among US companies offering British employees medical services on site. The trend, deemed a business efficiency in the US when it emerged in the 1980s as healthcare costs rose, is becoming more common in the UK. Isabel Berwick talks to broadcaster Davina McCall on how managers can tackle taboos and help women work through the menopause in the latest Working It podcast. Some good newsSome encouraging news in the treatment of Alzheimer’s: recent phase 3 trials have showed the effectiveness of new therapies in slowing cognitive and functional decline. More

Germany’s ability to attract business investment suffered an “alarming” decline last year, when more than €135bn of foreign direct investment flowed out of the country and only €10.5bn came in, according to a leading economic institute.The Cologne-based German Economic Institute (GEI) said the gap between outbound investments by German companies and business investment into the country in 2022 was the largest on record, based on data from the OECD.“The investment conditions in Germany had recently deteriorated again due to high energy prices and the increasing shortage of skilled workers,” said Christian Rusche, an economist at the GEI. The report said 70 per cent of the outbound investment by German companies went to other European countries, adding that this made it “particularly alarming that investments by European neighbours have collapsed”. Many of Germany’s problems were “home-made, including high corporate taxes, excessive bureaucracy and an ailing infrastructure,” it said. Rusche called on the government in Berlin to take steps to improve the country’s attractiveness for business. “The federal government urgently needs to take countermeasures to ensure that Germany becomes the first address for foreign investments again in the future,” he said.The figures come as the US offers large subsidies to tempt investment from companies in various sectors, including electric vehicles and renewable energy, via the Inflation Reduction Act, which the researchers said had accelerated the outflows of investment from Germany.Meanwhile, it warned that Germany was also receiving very little of the EU’s €750bn recovery fund, which was launched in response to the coronavirus pandemic to fund investments in areas such as green energy and digitisation and is focused on harder-hit economies, such as Italy.Germany has seen a few notable exceptions to the trend. US chipmaker Intel last year announced plans to build a semiconductor fabrication plant in Magdeburg, citing Germany’s “top talent [and] superb infrastructure”.But the plans were delayed as the US chip company found itself locked in tough negotiations with the German government. Intel demanded nearly €6bn more in subsidies because of rising energy costs and inflation. Berlin finally yielded, pledging a total of €10bn, or roughly a third of what Intel has committed to spend on the plant, highlighting how governments are increasingly dipping into taxpayers’ money to attract foreign direct investment. The deal will be the largest foreign direct investment into Germany. 

Germany’s sprawling manufacturing sector has been suffering from a downturn in recent months, hit by the sharp increase in energy prices after Russia’s invasion of Ukraine last year, as well as falling orders, weak export growth, and loss of market share for electric cars.“The German export model no longer works as well as it used to with increasing protectionism,” the report said. The findings are similar to those published in April by the Bundesbank, which also said that the net outflow of direct investment from Germany had risen to a record high last year.A study by consultancy EY published in May said there had been 832 new greenfield investments announced last year in Germany, down from 841 the previous year and 930 in 2020. More

Bank of England governor Andrew Bailey on Wednesday signalled interest rates in the UK are likely to stay higher for longer than financial markets are expecting because inflation has proved to be such a persistent problem. Speaking at a European Central Bank conference in Sintra, Portugal, Bailey suggested markets were wrong to think rates would fall quickly from a peak reached around the end of this year. Bailey said the BoE would be “evidence driven” in setting the cost of borrowing and it was looking at both the peak of rates and “how long [the peak] sustains beyond that”. “I’ve always been interested that markets think that the peak will be shortlived in a world [where] we’re dealing with more persistent inflation,” he added. Financial markets have currently priced in UK interest rates rising from 5 per cent to 6.25 per cent at around the end of the year, before beginning to fall during the spring or summer of 2024. However, expectations for rates in the summer of 2025 have shifted markedly higher over the past month, rising from 4.5 per cent to 5.5 per cent. UK inflation remained stuck at 8.7 per cent in May, according to official data.Bailey said the most important problem facing the UK was core inflation, which excludes volatile food and energy prices and is currently 2 percentage points higher than in the eurozone or the US.“It’s core that’s the issue, it’s much stickier,” he added, citing a buoyant UK labour market and a fall in the size of the workforce after the Covid crisis. Bailey said the BoE would not ask the government to make the central bank’s task of restoring price stability easier by raising the inflation target from its current 2 per cent level. “We are facing the biggest challenge for a very long time, but we’ve got to meet that challenge,” he added.He refused to comment on whether his task would be made easier if the government raised taxes or cut public spending to damp demand and spending in the UK economy. But he struck a different stance to that of BoE chief economist Huw Pill by suggesting there was a virtue in the central bank’s forecasts being partly based on announced government policies on tax and spending.“We always, when setting monetary policy, take fiscal policy as announced,” said Bailey.

By contrast, Pill highlighted how the BoE had got its August 2022 forecast of a UK recession wrong, partly because it assumed the government would not provide any support for households struggling with high energy bills.At the time of the forecast, the government had not announced support, but it went on to provide a cap on gas and electricity bills.“What was particularly unlikely was energy prices being at this very high level for ever and yet there being no fiscal response,” said Pill at the same ECB conference.The BoE this month announced a review of how it makes and uses economic forecasts, in an acknowledgment that it has made mistakes. More

Sri Lanka’s cabinet has approved a proposal to restructure the bankrupt country’s domestic debts of $42bn, a controversial decision that the government says is necessary to comply with the terms of its IMF bailout.Sri Lanka, which defaulted on its foreign debt last year, secured a $3bn, four-year lending programme with the fund in March and is in negotiations with creditors including China, India and Japan to restructure its foreign debts, amounting to another $42bn as of the end of 2022.But President Ranil Wickremesinghe’s government had been reluctant to restructure the country’s local-currency liabilities over fears that the hit to banks, pension funds and other financial institutions that hold the debt would derail Sri Lanka’s nascent economic recovery.Wickremesinghe’s office announced late on Wednesday that the cabinet had approved a domestic debt restructuring proposal and would submit it to parliament for approval on Saturday, without providing further details.Officials argue that Sri Lanka will not be able to meet the conditions of its IMF programme, such as lowering its debt-to-GDP ratio and gross financing needs, without also restructuring domestic debt.The government has declared successive holidays between Thursday and Monday in order to prevent a run on banks following the decision. In a speech on Tuesday, Wickremesinghe tried to reassure the public that its plan “poses no harm to bank depositors and will not lead to a collapse of the banking system”.Sri Lanka last year became the first Asia-Pacific country to default in more than two decades after running out of foreign currency because of economic mismanagement and the fallout from the Covid-19 pandemic.Wickremesinghe’s predecessor, Gotabaya Rajapaksa, was forced to resign and flee the country after mass protests over shortages of food and fuel.Sri Lanka has since become a test case for how to juggle the challenges facing many distressed low and middle-income countries.In particular, efforts to restructure its foreign debts have been slowed down by tension between the so-called Paris Club — made up of established lenders such as Japan — and China, whose importance as a creditor to the developing world has surged over the past decade.Beijing, Sri Lanka’s largest bilateral creditor with about $7bn in debts, had for months resisted agreeing to restructure along the IMF’s terms. It has also not joined a committee of creditors designed to speed up the restructuring process.The IMF has so far released $333mn of funds, with the rest due in a series of disbursements over the coming four years. In order to secure the next tranche later this year, Sri Lanka needs to show it has made significant progress in restructuring its debts.Officials argue that a domestic debt restructuring is vital to share the pain among creditors. Dimantha Mathew, research head at brokerage First Capital in Colombo, said authorities should be able to focus on debts held by Sri Lanka’s central bank, rather than commercial lenders and other financial institutions, which will help limit the economic fallout.“We don’t think they will touch the finance sector, since we’re already looking at a recovery,” he said. If not, he added, growth would risk being “hampered”. More