Aurelia Butler

OTTAWA (Reuters) -Canada’s annual inflation rate eased in March to 4.3%, its slowest pace in 19 months but still more than double the Bank of Canada’s 2% target, data showed on Tuesday.The headline inflation figure fell from 5.2% in February, matching expectations, as a decline in energy prices helped offset a record spike in mortgage costs, Statistics Canada data showed on Tuesday.”Inflation hasn’t been running this slow since 2021, but that’s still not enough to satisfy Canadian central bankers who are laser-focused on returning price growth to its 2% target,” said Royce Mendes, head of macro strategy at Desjardins Group.Month-over-month, the consumer price index was up 0.5%, also in line with forecasts. Gasoline prices fell for a second month in a row on an annual basis. Food prices gained 9.7% annually in March, down from 10.6% in February.Last week, the Bank of Canada (BoC) held its benchmark interest rate at 4.50%, as expected, but struck a hawkish tone, playing down market expectations for a rate cut this year as the risk of a recession diminished.”Inflation is coming down quickly – data this morning show it fell to 4.3% in March,” BoC Governor Tiff Macklem said in testimony in the House of Commons. Last week, the bank projected that headline inflation would cool to about 3% by mid-2023.”Continued strong demand and the tight labour market are putting upward pressure on many services prices, and those are expected to decline only gradually,” keeping the headline figure from hitting 2% until the end of 2024, Macklem added. Services prices rose 5.1% annually in March, while the price of goods increased by 3.6%, Statscan data showed. The March inflation reading benefited from a comparison to last year’s strong price increase. The average of two of the BOC’s core measures of underlying inflation, CPI-median and CPI-trim, came in at 4.5% compared with 4.9% in February.”I would characterize this as modestly good news,” said Doug Porter, chief economist at BMO Capital Markets. “We did see the expected come down in all the core measures. Things are mostly unfolding as expected.”Price rises of store-bought food slowed to 9.7% in March, falling below 10% for the first time in eight months. Excluding food and energy, prices rose 4.5% compared with a rise of 4.8% in February.Energy prices declined 6.9% annually in March while mortgage interest costs surged 26.4% annually, the largest yearly increase on record, as Canadians continued to renew and initiate mortgages at higher interest rates, Statscan said.The Canadian dollar was trading 0.1% higher at 1.3385 to the greenback, or 74.71 U.S. cents. More

The return of inflation has surprised many, including central bankers. So has the resulting rise in nominal interest rates. These surprises have brought others with them, notably a mini-shock to banking.The question, then, is: “What next?” Will inflation subside to ultra-low pre-Covid levels or will it be a lasting problem, as in the 1970s and early 1980s? What, too, will happen to interest rates?As Stephen King, adviser to HSBC, notes in We Need to Talk About Inflation, many were too complacent about the possibility of inflation’s return. As he notes, too, once inflation and, above all, inflationary expectations are entrenched, they become very painful to eliminate. Have we reached that point? Or do our institutions still have enough credibility and is enough of the inflation still transitory for us to be able to return to low inflation at a low cost?We are, in my view, more likely than not to return to inflation at around 2 per cent a year, or perhaps just a little bit higher. This is also what markets expect: according to the Federal Reserve Bank of Cleveland, US expected inflation is 2.1 per cent, almost exactly in line with the target. This shows confidence that the target will be delivered. The inflation risk premium is also estimated at 0.5 percentage points, which is in line with historic valuations.There are two (overlapping) arguments why this might prove too optimistic. One is that supply conditions have become more inflationary. De-globalisation and other shocks have permanently lowered the elasticity of supply of key inputs. That will raise the costs of keeping inflation down. The other is that the political economy of curbing inflation has worsened. Thus, the public cares less about inflation now, partly because it has no memory of a long period of high inflation. Moreover, governments want to lower their indebtedness, which is now far greater than 15 years ago, without curbing fiscal deficits. Finally, the inflation genie is now out of the bottle. Putting it back in will hurt.I remain unconvinced. Obviously, there is no necessary link between supply and inflation, since demand also matters. Provided aggregate demand grows in line with potential output and the structure of output is reasonably flexible, specific constraints are perfectly consistent with low overall inflation. Moreover, those responsible for monetary policy will not want to go down in history as those responsible for losing monetary stability. Last but not least, they know that it will be far easier to crush inflation now than have to tighten yet again later. (See charts.)Assume that this is correct. Then the inflation components in nominal interest rates will not be permanently raised. But what about the real element? Real interest rates fell for a generation, before reaching negative levels during the pandemic. Since then, they have recovered sharply. What happens now?In its latest World Economic Outlook, the IMF addresses this question by investigating the “natural rate of interest”, which is defined as “the real interest rate that neither stimulates nor contracts the economy”. That is also the rate at which one would expect inflation to remain stable (in the absence of shocks). The natural rate is not directly observable. But it can be estimated. The main conclusion of its analysis is that “once the current inflationary episode has passed, interest rates are likely to revert towards pre-pandemic levels in advanced economies”. After the recent shocks, then, real and nominal rates will fall back to where they were in 2019. In particular, it expects the effect of further ageing to be modest, as is also the (opposite) effect of higher public debt.In March, two leading macroeconomists, Olivier Blanchard and Lawrence Summers, debated this issue in detail for the Peterson Institute for International Economics. Of the two, Blanchard came closest to the IMF position. Summers, who had reintroduced the idea of “secular stagnation” into the policy debate in 2015, has now changed his mind, arguing that rates will be significantly higher than in the recent past.The difference is not huge. Blanchard argues that real interest rates will remain below the real rate of economic growth, which is crucial for debt sustainability. He does not suggest that they will return to negative levels. Summers thinks they will somewhat be higher than the Fed’s estimate of a natural rate of 0.5 per cent. One reason why real rates will be higher than before, they agree, is higher investment in the energy transition. Another is the need to spend more on defence. Higher public debt may also raise real rates, though inflation is eroding debt away.These two disagree, however, on whether the persistent demand reflects temporary (Covid-related) factors or more durable strength. They disagree on how far risk aversion will keep yields on safe assets low. They disagree on whether ageing will raise savings further. And they disagree, too, on the likely impact of public debt on interest rates. In all these respects, Blanchard takes a position that justifies lower natural rates and Summers one that justifies the opposite. His position is close to that adopted by Charles Goodhart and Manoj Pradhan.So, assume inflation will decline to 2-3 per cent. Assume, too, an equilibrium real rate of interest of 0-2 per cent. Then nominal short rates would be 2-5 per cent and, given risk premiums, longer-term rates would be 3-6 per cent. At the lower end, debt sustainability would be simple. At the higher end, it would be a challenge. This range of uncertainty is large. Yet reality could still be different.The return of inflation has changed the world. The question is how much. It is one to which time will give its answer. My own guess is not decisively [email protected] Martin Wolf with myFT and on Twitter More

Pressures in the UK labour market are starting to ease, but wage growth has not slowed as much as economists expected, according to official data released on Tuesday.Figures from the Office for National Statistics showed average wages in the private sector, excluding bonuses, were 6.9 per cent higher in the three months to February than a year earlier, down from growth of 7.3 per cent in the final quarter of 2022. Public sector wage growth still lagged the private sector but by a slimmer margin, with average wages excluding bonuses up 5.3 per cent on the year.The data leaves the Bank of England’s Monetary Policy Committee with a finely balanced decision on whether to raise interest rates from a 15-year high of 4.25 per cent, or hold them unchanged for the first time in 18 months, when it next meets on May 11. The slowdown in wage growth — one of the key indicators that monetary policymakers are tracking — was more gradual than expected, owing to revisions to January’s figures and a fresh acceleration in pay in February. Victoria Clarke, economist at Santander CIB, said Tuesday’s figures did “not deliver the reassurance that the MPC is likely to be looking for” of wage growth moderating towards rates consistent with its 2 per cent inflation target. Modupe Adegbembo, economist at Axa Investment Managers, said the renewed strength in wages would “unsettle the MPC, adding to fears of greater persistence in inflation”. But other developments suggested the labour shortages that have fuelled wage rises were starting to ease.The unemployment rate edged up to 3.8 per cent from 3.7 per cent the previous quarter, the number of vacancies fell for a ninth consecutive month and the number of people choosing not to work or seek a job fell as students returned to the workforce.This decline in economic inactivity boosted the employment rate by 0.2 percentage points from the previous three-month period to 75.8 per cent. However, most of the growth was driven by part-time work and self-employment rather than by employers creating new posts. Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said this showed the labour market was “not nearly as hot as the employment figures imply”. But he added that the revisions to wage growth data meant there was an equal chance of the MPC leaving rates unchanged or raising them by 25 basis points.

Despite the rise in employment, the UK workforce remains smaller than it was before the Covid-19 pandemic. The number of economically inactive people of working age is still more than 400,000 higher than its pre-pandemic level; almost all of the increase represents people who say they are not in work because of a long-term health condition.Tony Wilson, director of the Institute for Employment Studies, a research consultancy, said post-pandemic progress on boosting the number of people in work had been “painfully slow” and that it was “clearer than ever that we are being left behind by other major economies”. Business groups also warned of continuing hiring difficulties, with Neil Carberry, head of the Recruitment & Employment Confederation, describing the shortage of workers as “the defining feature of our labour market right now”. However, he said the situation was “not as fizzy” as in 2022, with pay “rising strongly . . . but not at a rate that will cause further inflation”.Jane Gratton, head of people policy at the British Chambers of Commerce, said vacancies remained “a drag anchor on firms, preventing them from fulfilling orders and taking on new work”. She called for ministers to swiftly implement their promised expansion of free childcare and to be “pragmatic” about broadening the list of shortage occupations for which immigration requirements are relaxed.Employment minister Guy Opperman said the government was boosting training and childcare to “break down barriers for people out of work”, while increasing the minimum wage and extending cost of living support payments. More

ST. LOUIS (Reuters) – The U.S. central bank should continue raising interest rates on the back of recent data showing inflation remains persistent while the broader economy seems poised to continue growing, even if slowly, St. Louis Federal Reserve President James Bullard said.In comments countering views that the U.S. is heading towards a banking crisis, a recession, or both in the near future, Bullard told Reuters in an interview: “Wall Street’s very engaged in the idea there’s going to be a recession in six months or something, but that isn’t really the way you would read an expansion like this.”Investors may see rate cuts in the Fed’s near future, part of a recession-breeds-accommodation view of the world, but “the labor market just seems very, very strong. And the conventional wisdom is that if you have a strong labor market that feeds into strong consumption … and that’s a big chunk of the economy … it doesn’t seem like the moment to be predicting that you have a recession in the second half of 2023,” he said.Despite the current 3.5% unemployment rate, Fed staff at the central bank’s March 21-22 policy meeting said they also anticipate a “mild recession” this year, while Bullard’s colleagues have penciled in an economic outlook that indicates zero growth or a contraction for much of the rest of the year after a relatively strong first quarter. In the case of the staff forecast, the fallout from recent stress in the banking sector seemed to tip the scales.But if two U.S. bank failures last month were going to spark a crisis, Bullard said, it’d likely be showing up in things like the St. Louis Fed’s financial stress index. The index did spike after the March 10 collapse of Silicon Valley Bank, but it quickly reverted to a normal reading. “If you were really going to get a major financial crisis out of this, that index would spike up to a four or five. It’s zero now. So it doesn’t look, as of this moment, like too much is happening,” Bullard said.(Graphic: Financial stress eases after bank failures, https://www.reuters.com/graphics/USA-FED/BULLARD/gkvlwjygkpb/chart.png)HIGHER TERMINAL RATE Bullard’s remarks stake out the aggressive side of a debate underway at the Fed about how to calibrate the final steps of an historically fast rate hiking cycle against both evidence that underlying inflation is not falling very fast towards the central bank’s 2% target, and signs the economy is slowing under the “bite” of the rate increases approved so far. Measures like the Dallas Fed trimmed mean inflation rate have been flat over several months, an indication – depending on the point of view – of underlying inflation still more than double the Fed’s target that needs to be squelched, or of the delayed impact of monetary policy still to be felt.The bulk of Fed policymakers as of March felt one more rate increase, which would raise the benchmark overnight interest rate to a range between 5.00% and 5.25%, was all that would be needed. That could come at the Fed’s May 2-3 meeting. While agreeing that the tightening cycle may be close to the finish line, Bullard feels the policy rate will need to rise another half of a percentage point beyond that level, to between 5.50% and 5.75%.Some policymakers and analysts worry it is those final steps that could push the economy into a recession. And beyond the rate hike decision next month, the Fed will have to send some signal about what happens next – whether to keep the language in the current policy statement that “some additional policy firming may be appropriate,” or point to a pause.(Graphic: Rates and inflation, https://www.reuters.com/graphics/USA-FED/INFLATION/gkvlgnaywpb/chart.png)LIMIT GUIDANCE Given how inflation and the economy are behaving, Bullard said, the fewer promises made the better.”You want to be responsive to incoming data through the summer into the fall,” he said. “You wouldn’t want to be caught giving forward guidance that said we’re definitely not doing anything and then have inflation coming in too hot or too sticky.”Once interest rates are at a level considered “sufficiently restrictive” to slow inflation, Bullard said he felt “the bias would be higher for longer” to be sure it is fully under control.It won’t, he argues, require a large increase in the unemployment rate to do the job, a view that melds hawkishness on inflation with relative bullishness on where the economy is heading.But it will take more time for people, businesses and local governments to spend through their pandemic-era savings, and, as that spending slows, for price competition among firms to curb inflation over time.Recession forecasts “are coming from models that put too much weight on the idea that interest rates went up quickly,” Bullard said. “What about the strong labor market? What about that feeding consumption? … What about the pandemic money still to be spent off, both at the state and local level and at the individual household level?”Inflation is coming down, but not as fast as Wall Street expects.” More

NEW YORK (Reuters) – Consumers are starting to fall behind on their credit card and loan payments as the economy softens, according to executives at the biggest U.S. banks, although they said delinquency levels were still modest.Profits at Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co (NYSE:JPM), Wells Fargo (NYSE:WFC) & Co and Citigroup Inc (NYSE:C) beat analyst forecasts as lending giants earned a windfall from rising interest rates. But industry chiefs warned that the strength would tail off this year as a recession looms and customer delinquencies climb.”We’ve seen some consumer financial health trends gradually weakening from a year ago,” Wells Fargo Chief Financial Officer Mike Santomassimo said on a conference call Friday to discuss its first quarter results.While delinquencies and net charge-offs — debt owed to a bank that is unlikely to be recovered — have slowly risen as expected, consumers and businesses generally remain strong, the bank’s CEO Charlie Scharf said. The company set aside $1.2 billion in the first quarter to cover potential soured loans.Citigroup also made larger provisions for credit losses even as it brought in more revenue from clients’ interest payments on credit cards. Delinquency rates were rising as anticipated, but still stood below normal levels in the bank’s “very high quality” loan portfolio, said Mark Mason, the bank’s finance chief. “We have tightened credit standards specifically as a result of the current market environment in cards, we continue to calibrate our credit underwriting based on what we’re seeing based on macroeconomic trends,” Mason said.Delinquency rates will probably return to “normal” levels of 3% to 3.5% for branded cards and 5% to 5.5% for retail services by early 2024, Mason said. Current delinquency rates are 2.8% for branded cards and 4% for retail services, according to Citi’s presentation on its earnings. Bank of America provisioned $931 million for credit losses in the quarter, much higher than the $30 million a year prior, but below fourth quarter $1.1 billion provision. Total net charge-offs with credit reached $807 million, increasing from the former quarter but still below pre-pandemic levels, the bank said in its earnings release.”The consumer’s in great shape in terms of credit quality by any historical standards. Employment remains good, wages remain good, and we haven’t seen any cracks in that portfolio yet”, Bank of America Chief Financial Officer Alastair Borthwick told reporters.Some of JPMorgan’s customers were starting to fall behind on payments, but delinquency levels were still modest, said Jeremy Barnum, finance chief at the largest U.S. lender. “We are not seeing a lot there to indicate a problem,” he said.The bank more than doubled the amount it set aside for credit losses in the first quarter from a year earlier, to $2.3 billion, reflecting net charge-offs of $1.1 billion.Worsening economic conditions would lead to “credit deterioration throughout 2023 and 2024 with losses eventually surpassing pre-pandemic levels given an oncoming recession,” predicted UBS analysts led by Erika Najarian. Still, loan defaults are forecast to stay “below the peaks experienced in prior downturns,” they said.As large and medium-sized lenders become more conservative in underwriting, their net charge offs will probably to peak in several quarters, wrote Morgan Stanley (NYSE:MS) analyst Betsy Graseck. “This means slower loan growth” 2023 and 2024, she wrote. More