Aurelia Butler

Sterling slid to its lowest level since 1985 against the dollar on Friday after a round of weaker than expected data on UK retail sales amplified concerns that the country was headed for a prolonged recession.The pound dropped 0.8 per cent in London trading to $1.137, the first time it has breached the $1.14 mark in almost four decades, according to Refinitiv data. The decline, which comes 30 years to the day since “Black Wednesday”, when sterling crashed out of the European Exchange Rate Mechanism, reflected broad strength in the dollar as well as particular concern about the state of the UK economy.Sterling was off about 0.4 per cent against the euro at €1.142, its weakest level since early 2021. Retail sales fell sharply in August as UK consumers struggled with soaring prices and high energy costs, according to data published on Friday by the Office for National Statistics. The quantity of goods bought in the UK fell 1.6 per cent between July and August, reversing a small expansion in the previous month.This was a larger drop than the 0.5 per cent contraction forecast by economists polled by Reuters and the largest fall since July 2021, when Covid-19 restrictions on hospitality were lifted.Olivia Cross, economist at Capital Economics, said the figures suggested “that the downward momentum is gathering speed” and supported her view that “the economy is already in recession”. The ONS said that “rising prices and cost of living” were affecting sales volumes, which have continued a downward trend since the summer of 2021, following the reopening of the economy after pandemic lockdowns. The figures highlighted how high inflation has hit consumers and the wider economy. The government’s £150bn energy support package announced this month is expected to limit the blow from the recent surge in gas prices, but it did not dispel the risk of a recession.Victoria Scholar, head of investment at Interactive Investor, said the fact that sterling fell against both the dollar and euro on Friday showed “this is not a dollar move . . . but in fact it is traders selling the pound amid negative sentiment towards the UK’s economic outlook and investment case”. Bank of England data also show that the effective sterling exchange rate, a measure that is weighted to take into account its competitiveness against major trading partners, has declined 6.5 per cent since the start of the year. The gauge is still above the historic lows it reached in 2020 and 2016. The BoE is expected to raise interest rates for the seventh consecutive time at its meeting next week as it deals with an inflation rate nearly five times its 2 per cent target. However, the weak retail sales figures could steer the BoE towards a 0.5 percentage point rate rise when policymakers meet next week, rather than a 0.75 percentage point increase some had expected, said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics. The US Federal Reserve is broadly expected to raise rates by at least 0.75 percentage points next week and a smaller BoE rate rise could further dent the allure of holding the pound. In a sign of the struggles for the UK economy, the quantity of goods bought by consumers was almost down to pre-pandemic levels from a peak of nearly 10 per cent above in April 2021.All main sectors fell over the month, but non-food stores were the biggest driver. This is because of large sales drops in department stores, down 2.7 per cent, household goods stores, down 1.1 per cent and clothing stores, down 0.6 per cent. Notable declines in sports equipment, furniture and lighting gave “an indication of the types of items consumers push to the bottom of their priority list in difficult times”, said Sophie Lund-Yates, analyst at the financial services company Hargreaves Lansdown.Online sales also fell sharply, by 2.6 per cent, with food being the third biggest component of the monthly decline.

While food sales were particularly affected by the reopening of the hospitality sector, the ONS reported that “in recent months, retailers have highlighted that they are seeing a decline in volumes sold because of increased food prices and cost of living impacts”.Fuel sales also dropped 1.7 per cent, and were 9 per cent below their pre-pandemic levels, reflecting the impact of soaring prices at the pump on car trips despite some easing in August prices compared with the previous month. Lynda Petherick, retail lead at the consultancy Accenture, said that “with a difficult winter to come, it will come as a worry to retailers that shoppers have already reined in their spending despite the hot summer”. More

The writer is president of the William and Flora Hewlett FoundationThe failings of the political and economic paradigm known as “neoliberalism” are now familiar. However well suited it may have been to addressing stagflation in the 1970s, neoliberal policy has since then fostered grotesque inequality, fuelled the rise of populist demagogues, exacerbated racial disparities and hamstrung our ability to deal with crises like climate change. The 2008 financial crash exposed these flaws and inspired a reassessment of how government and markets relate to society — an effort given fresh energy by the pandemic, which elicited a range of (successful) public actions at odds with neoliberal bromides.But powerful interests remain attached to neoliberalism, which has served them well. Regrettably, the re-emergence of inflation has given them a hook not merely to criticise US President Joe Biden’s spending, but to condemn efforts to change the prevailing paradigm as “socialistic” moves to destroy capitalism. Though the causes of today’s inflation are complex, we have tools to deal with it and have begun to apply them. Managing the economic fallout from Covid-19 and the war in Ukraine must not be allowed to derail a long-overdue process of adapting governance for a 21st century economy and society.Neoliberals accomplished many things in the 50 years their ideology has been dominant, but none is more impressive than their success in equating a very particular, very narrow conception of capitalism with capitalism itself — as if any deviation from their approach to government and markets is perforce not capitalism or against capitalism. But capitalism, properly understood, requires only that trade and industry are left primarily in the hands of private actors, something no one today seeks to overthrow. This allows room for countless different relationships among private business, government and civil society — possibilities limited only by imagination and choice. Mercantilism, laissez-faire and Keynesianism were all forms of capitalism, as was FDR’s New Deal. As, for that matter, are the social democracies of northern Europe. In all these systems, production remains in private hands and market exchanges are the dominant form of economic activity. Since markets are created and bounded by law, there is no such thing as a market free from government. Neoliberalism limits government regulation to securing markets that operate efficiently as to price. Which is a conception of capitalism, but certainly not the only one. The genius of capitalism has, in fact, been in finding new ways to capture the energy, innovation and opportunity that private enterprise can offer, while adapting to changing circumstances. Mercantilism gave way to laissez-faire, which gave way to Keynesianism, which gave way to neoliberalism — each a capitalistic system that served for a time before yielding in the face of material and ideological changes to something more suited to a new context.We are plainly in the midst of such a transformation today — driven by vastly increased wealth inequality, global warming, demands to address festering racial disparities, the rise of populism and new technologies. These developments have been accompanied by alarming political and social disruption. As faith in neoliberalism crumbles, we observe leaders — from Donald Trump to Jair Bolsonaro, Viktor Orbán and Vladimir Putin — embracing toxic forms of ethno-nationalism, with China’s vision of state capitalism looming in the wings as an alternative. These are terrible options, but we’re not going to forestall them by exhorting people to stick with a neoliberal system in which they have already lost faith. Change is happening; the question is whether it will be change for the better.If capitalism is to survive, it will need to adapt, as it has done in the past. We need to acknowledge how neoliberalism has failed and address the legitimate demands of those it has failed. Alternative possibilities abound: how capitalism should change is something we must debate. The only position that makes no sense is protesting that any change is “anti-capitalism”, as if Milton Friedman and friends achieved some perfect, timeless wisdom in the 1970s.In the end, markets and governments are just devices to provide citizens with the physical environment and opportunities for the material success needed to flourish and live with dignity. Neoliberals lost sight of this and began treating the market as an end in itself. They failed to see how their version of markets was not working for the majority of people. We’re now living with the consequences of their blindness, and we need to rebuild and reimagine, before it’s too late. More

Belgian chemicals group Solvay plans to create the second European site producing rare earths vital for the energy transition, as the continent rushes to break China’s dominance over the hard to extract elements.The company said on Friday that its La Rochelle plant in France would be upgraded to separate a larger range of the 17 rare earths to include neodymium and praseodymium, which are crucial in the production of magnets for electric vehicles and wind turbines.The decision to invest tens of millions of euros in the facility comes two days after EU leaders called for new legislation to address China’s grip over the supply chain for critical raw materials. The Asian nation controls 80 per cent of global rare earths processing capacity.Disruption to gas supplies in the wake of Russia’s invasion of Ukraine has sharpened EU officials’ minds on the risks of relying on one country for materials needed for the transition to a lower-carbon economy.“Lithium and rare earths will soon be more important than oil and gas,” EU commissioner Thierry Breton said this week. “Our demand for rare earths alone will increase fivefold by 2030.”The 78-year-old La Rochelle plant, which supplies rare earths for automotive catalytic converter and semiconductor production, will help bolster Europe’s autonomy over the rare earth supply chain. It will join Neo Performance Materials, which has a separation site in Estonia, in producing the rare earths needed for electric cars and wind turbines. The UK has a rare earths separation project under construction through London-listed Pensana. “Rare earths are essential to ensure the green energy transition,” said Ilham Kadri, chief executive of Solvay, which recently settled a longstanding dispute with an activist investor. “Our investments in the magnets’ value chain will help Europe power its new economy.”However, the rare earth supply chain involves many steps including turning separated rare earth oxides into metals and magnet production that analysts say are required to loosen Beijing’s control over the flow of critical materials and components.“It’s a good step forwards,” said David Merriman, rare earths research director at Wood Mackenzie. “For automotive manufacturers, there are a few stages that need to be filled in to make it directly contact their supply chain.”Europe imports about 16,000 tonnes a year of rare earth permanent magnets from China, meeting approximately 98 per cent of EU demand, according to a report by the European Raw Materials Alliance.Under the proposed EU Critical Raw Materials Act, permitting will be streamlined, funding will be allocated to strategic projects and strategic stockpiles of materials will be built.The EU has been much slower to build raw material supply chain resilience than countries such as Japan, which financed what is now the largest western rare earths producer Lynas, after China unofficially banned rare earth exports to the country a decade ago over a geopolitical dispute. More

Rising mortgage interest rates are piling pressure on millions of UK homeowners at a time when soaring bills for energy, food and fuel are blowing holes in household budgets across the country. The choices facing mortgage borrowers are set to worsen next week, when the Bank of England is widely expected to raise its main interest rate for the seventh time since December. Most borrowers will have protected themselves from the immediate impact of any decision by opting for a fixed-rate mortgage deal. But those who fixed at a time of ultra-low rates may be in for a shock when they refinance, with the average two-year fix now coming in at over 4 per cent. “The base rate changes are coming thick and fast,” says David Hollingworth, director at mortgage broker L&C. “Those who are just feeling buffeted from all sides need to get hold of it and if they’ve not done anything about reviewing mortgage rates that should be the priority.”Making sure you’re getting the best available deal is just one of the steps borrowers can take to mitigate the pain of interest rate rises. FT Money explores some of the options for those confronting a home loan crunch. Move fastLenders’ standard variable rates, which tend to track BoE base rate changes, show the extent to which rate changes have affected household budgets. In early December 2021, when the BoE’s main interest rate was at 0.1 per cent, standard variable rates at big lenders such as Nationwide and Halifax were around 3.59 per cent. Since then, six successive increases have brought base rates up to 1.75 per cent — and SVRs have risen to around 5.24 per cent, according to L&C. In December, someone with a £300,000 mortgage on SVR would have paid £1,516 a month in interest. At current rates, they pay an additional £280 a month. But if the base rate hits 2.25 per cent next week, that extra monthly figure could reach £370, L&C estimates. Most borrowers already know to avoid SVR, typically the most expensive form of mortgage borrowing in a lender’s arsenal, though Hollingworth points out many will have drifted on to these rates at a time when the difference between SVR and other options mattered less. Increasingly, therefore, fixed-rate deals are becoming the only game in town. Among new buyers, 19 out of 20 (95.5 per cent) are taking out a fixed-rate mortgage, according to the Financial Conduct Authority, while 17 out of 20 mortgaged homeowners have fixed their rates. “More homebuyers are taking out mortgages with fixed rates than ever before,” says Lawrence Bowles, director of research at estate agent Savills.By opting for fixed-rate mortgages, borrowers are seeking to lock in rates in expectation of further rises later. But the costs of this type of deal are rising fast, too. Borrowers now looking for another offer as their fixed period comes to an end will face much more expensive terms. Average rates on a two-year fix have nearly doubled from 2.24 per cent a year ago to 4.24 per cent this week, according to finance website Moneyfacts. Not only that but banks and building societies are rapidly paring back the number of home loans they offer. Over 500 deals were pulled from the market in the month to September, Moneyfacts found. There are now 1,425 fewer deals available than at the beginning of December 2021. Lenders often struggle to cope with demand if their deals top the ranks of the “best buys” on the market and they find themselves attracting a flood of customers. This can be frustrating for borrowers who identify a deal, only to find it withdrawn by the time they apply. Last week, for instance, Barclays withdrew six mortgage products only a day after it introduced them, citing the challenges lenders face “when balancing service with product availability”. This week it raised the rates on 20 of its deals by 0.4 percentage points. The upshot for borrowers is that they should be ready to grab a rate as soon as it looks like a good fit for their requirements. Aaron Strutt, technical director at mortgage broker Trinity Financial, says: “Most mortgages last longer than a day, but in many cases they may only be available for three or four days, with many lenders sending multiple rate change emails each week.“If you find a rate that you like it’s worth securing it quickly because it will not be around for long.”Beat the deadlineThis autumn and next year, a wave of UK homeowners will come to the end of their fixed mortgage deals secured during the good times of ultra-low rates. UK Finance, the trade body, estimates 1.8mn people will see their fix elapse in 2023. Mortgage costs have risen this year but are expected to rise further, even as August’s inflation figures came in this week lower than anticipated, with the consumer prices index levelling off at an annual 9.9 per cent. The good news for borrowers facing a refinancing crunch next year is that many lenders will allow them to secure a fixed-rate deal well ahead of the end of their current fix. A mortgage offer will typically be valid for up to six months, so borrowers can bank a lower rate with a view to completing it once their current deal comes to an end.That benefits them in two ways, says Hollingworth. “It gets ahead of any further increases in fixed rates that might feed through — which currently still remains the direction of travel. Second, they get the benefit of the remainder of any lower rate they currently enjoy.” Borrowers should even consider starting the process ahead of the six-month offer period, says Simon Gammon, managing partner of broker Knight Frank Finance, since some lenders such as Nationwide will honour the rate on which they apply for the mortgage. “You have up to three months in which to get the mortgage offer approved at that rate. And once it’s approved, you then have six months in which to draw it down,” he says.Some borrowers may consider a “clean break” to be preferable, by coming out of their current fix early — in spite of incurring early repayment charges — and moving to another, perhaps longer-term, deal straightaway. But brokers say they should exercise caution before giving up an attractive current deal. “You won’t know until you’ve got the luxury of hindsight as to whether that was a good decision or not — because you don’t know how rates will progress from here. And you’ll have a hefty repayment charge to contend with in most cases,” says Hollingworth.Borrowers seeking to refinance must decide whether to stay with their current lender — an option known as a “product transfer” — or remortgage elsewhere. In recent months, lenders have improved rates on product transfers to keep customers loyal. But these transfer deals may only be locked in three to four months ahead of the expiry of the existing rate, notes Chris Sykes, technical director at broker Private Finance. At a time of rapidly changing interest rates, borrowers must trade off the possibility of securing an attractive deal now with a new lender against a discounted “loyalty” rate from the existing lender closer to the moment of expiry. “The best advice [is] usually to secure a remortgage as early as possible then re-look at things nearer to the time of product renewal, potentially then doing a product switch instead,” Sykes says. Repay or restructureOne reason to hang on to an existing fix until it ends is that it gives borrowers an option to overpay while their effective interest rate is low, reducing the total size of their mortgage and potentially giving them access to better rates in future. For those fortunate enough to be able to do this, most lenders allow overpayments of up to 10 per cent a year. With other household bills climbing steeply, doing so in the long run should mean you’ll have to set aside less of your overall budget to pay for the mortgage. But there are other, more radical, ways of reducing the size of your monthly payments. First, if you think you will be unable to make your repayments and fear you will fall into arrears, your lender might allow you to move temporarily to an interest-only arrangement, cutting your monthly commitments substantially. They will usually only allow this where borrowers have a set minimum of equity in the home and with loan-to-value levels towards the lower end of the scale.Ray Boulger, senior mortgage technical manager at broker John Charcol, says one strategy would be to switch to interest-only to slash your monthly payments, and then — if you can afford it — pay up to 10 per cent of the overall debt without incurring a repayment charge. “You’ve got a much lower commitment, but you’re contractually meeting your obligations. And then if you choose to overpay, that’s absolutely fine. Whereas if you’ve got to retain the mortgage and you simply underpay, even though you’re paying all the interest, you’ll be deemed to be in arrears and then you’ll get a bad credit rating.” Keeping a clean credit history is a major consideration. Going into arrears makes it much harder to get another mortgage and, even if you can, lenders are likely to charge you a higher rate, which compounds potential payment problems. Boulger adds that anyone considering a short-term or permanent switch on to interest-only needs to scrutinise the terms with the bank. “If you are going to change your mortgage conditions, always ask the lender to confirm that it won’t adversely affect your credit rating.”A second way of cutting your monthly payments is to extend the term of your mortgage, so it is repaid not over, say, 25 years, but 30 or 40. This won’t always be possible, given lenders’ rules on the age by which you must have paid off the loan, but some will be more flexible than others. “It won’t have as big an impact as switching to interest-only, but it may still be enough to get you over any short term financing problems,” says Boulger. He warns, though, that taking longer to pay back your mortgage means you’ll pay more interest over the term of the loan, raising your costs in the long term, if not the short.Scale back your ambitionsIt has been a year of high demand among homebuyers and short supply at estate agents, pushing up property prices and encouraging buyers to stretch themselves financially to outbid rivals. But there are signs that buyers are tempering their aspirations. Interest rates rises and the cost of living have started to impact buyers’ budgets, according to a survey this week by Savills. Almost a third (29 per cent) of 1,000 prospective buyers quizzed in late August said they had cut back their budgets because of these factors. The proportion was higher for those with mortgages: some 44 per cent of those looking to move to a new home said they had reduced their budget.“Despite transactions remaining robust over the summer months, there’s now certainly less urgency in the market, with rising costs of debt impinging on the budgets of those most reliant on a mortgage. Increased costs of living are also making buyers much more conscious when it comes to how much they are willing to spend,” says Frances McDonald, Savills research analyst.Gammon at Knight Frank Finance says the shift in mood among buyers seeking mortgage finance has been tangible over the past month, as the “sellers’ market” of the past two years fades. “We’re seeing those who are looking to buy a property starting to pause and say — actually, I’ve rerun the numbers and I just can’t afford a mortgage that big any more. They say they’ll have to check with their wife or husband about what’s realistic, because this has suddenly gone from very affordable to a real stretch.” Higher earners are also changing their behaviour when it comes to the costs of debt. Lisa Parkes, a private banker at Investec, describes a longstanding British client with a £3mn mortgage facility on a £5mn home. This “revolving mortgage” allows him to draw down cash to put into investments or second home purchases as and when he chooses, or to repay it with no penalties charged. “He’s always valued flexibility in having access to liquidity,” she says. Now, though, the expense of maintaining such a credit facility has brought him back to a much more mainstream mortgage model. “We’re looking at a 70 per cent loan-to-value on a five-year fixed . . . That price differential has never been a concern for him in the past, but now it is.”She notes similar concerns among other clients. “It’s unprecedented, really.”

The five-year fixed deal has become the arrangement of choice. At 4.33 per cent for the average five-year deal, compared with 4.24 for the two-year, Moneyfacts data suggests there is little to choose between them when it comes to rates. Gammon says less than half of the deals coming through the broker a year ago would have been fixed for five years or more. “Now two-thirds of the deals we’re doing are on long-term fixed rates.” Readers who lived through previous eras of mortgage distress may regard current worries over potential rises in interest rates to be overblown; in 1989, after all, base rates hit 14 per cent, and 17 per cent in 1979. But a return to “normal” base rates would have a much more serious effect on borrowers’ finances now, says Neal Hudson, director of market research company Residential Analysts. “Mortgages are now at much higher multiples of income . . . and most are on a repayment basis. This leaves current borrowers very exposed to even slightly higher rates, let alone those at 4 per cent plus,” he says. Hudson illustrated the difference by calculating what today’s mortgage rates would have to be to match the mortgage repayment ratios of previous years. The results are sobering: repayments under the 14 per cent rate of 1980 are equivalent to repayments today at a rate of 3 per cent. As the rate rises look likely to clock up for months to come, borrowers would be wise to revisit their financial assumptions and ambitions. More

Where would you rather live? A society where the rich are extraordinarily rich and the poor are very poor, or one where the rich are merely very well off but even those on the lowest incomes also enjoy a decent standard of living?For all but the most ardent free-market libertarians, the answer would be the latter. Research has consistently shown that while most people express a desire for some distance between top and bottom, they would rather live in considerably more equal societies than they do at present. Many would even opt for the more egalitarian society if the overall pie was smaller than in a less equal one.On this basis, it follows that one good way to evaluate which countries are better places to live than others is to ask: is life good for everyone there, or is it only good for rich people?To find the answer, we can look at how people at different points on the income distribution compare to their peers elsewhere. If you’re a proud Brit or American, you may want to look away now.Starting at the top of the ladder, Britons enjoy very high living standards by virtually any benchmark. Last year the top-earning 3 per cent of UK households each took home about £84,000 after tax, equivalent to $125,000 after adjusting for price differences between countries. This puts Britain’s highest earners narrowly behind the wealthiest Germans and Norwegians and comfortably among the global elite. So what happens when we move down the rungs? For Norway, it’s a consistently rosy picture. The top 10 per cent rank second for living standards among the top deciles in all countries; the median Norwegian household ranks second among all national averages, and all the way down at the other end, Norway’s poorest 5 per cent are the most prosperous bottom 5 per cent in the world. Norway is a good place to live, whether you are rich or poor.Britain is a different story. While the top earners rank fifth, the average household ranks 12th and the poorest 5 per cent rank 15th. Far from simply losing touch with their western European peers, last year the lowest-earning bracket of British households had a standard of living that was 20 per cent weaker than their counterparts in Slovenia.It’s a similar story in the middle. In 2007, the average UK household was 8 per cent worse off than its peers in north-western Europe, but the deficit has since ballooned to a record 20 per cent. On present trends, the average Slovenian household will be better off than its British counterpart by 2024, and the average Polish family will move ahead before the end of the decade. A country in desperate need of migrant labour may soon have to ask new arrivals to take a pay cut.Across the Atlantic it’s the same story, only more so. The rich in the US are exceptionally rich — the top 10 per cent have the highest top-decile disposable incomes in the world, 50 per cent above their British counterparts. But the bottom decile struggle by with a standard of living that is worse than the poorest in 14 European countries including Slovenia.To be clear, the US data show that both broad-based growth and the equal distribution of its proceeds matter for wellbeing. Five years of healthy pre-pandemic growth in US living standards across the distribution lifted all boats, a trend that was conspicuously absent in the UK.But redistributing the gains more evenly would have a far more transformative impact on quality of life for millions. The growth spurt boosted incomes of the bottom decile of US households by roughly an extra 10 per cent. But transpose Norway’s inequality gradient on to the US, and the poorest decile of Americans would be a further 40 per cent better off while the top decile would remain richer than the top of almost every other country on the planet.Our leaders are of course right to target economic growth, but to wave away concerns about the distribution of a decent standard of living — which is what income inequality essentially measures — is to be disinterested in the lives of millions. Until those gradients are made less steep, the UK and US will remain poor societies with pockets of rich people.Use the interactive version of the chart below to compare other countries:

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What is inflation? The answer seems obvious: when things get more expensive, that’s inflation, and it’s bad. But an alternative view is Milton Friedman’s. In a talk in 1963, the hugely influential economist defined inflation as “a steady and sustained rise in prices” and added that “inflation is always and everywhere a monetary phenomenon”.The distinction matters. Consider two scenarios that might illuminate it. In both of them, consumer prices have increased by 10 per cent over the past year.In Inflation World, there’s too much money around. Everything is getting more expensive at much the same rate, including labour. With your wages rising at the same rate as prices, the situation is disorienting and slightly inconvenient, but it’s not a crisis. The main risk is that inflation becomes self-perpetuating, and the main responsibility for solving the problem lies with the central bank.In Energy Crunch World, the cost of energy has doubled. About 10 per cent of spending used to go into energy; that’s now about 20 per cent. In Energy Crunch World, the consumer price index has still risen by 10 per cent, and the situation is described by all reputable reporters as “inflation of 10 per cent”, just as in Inflation World. But the increase in prices is not “steady”; it’s not widespread; and it is unlikely to be “sustained”. The risk of a self-perpetuating energy shock is small. It is hard to imagine that we would be spending 30 per cent of income on energy next year, 40 per cent the year after and 50 per cent the year after that. But the damage is bad enough; rather than being mildly disorienting, this is a crisis. A basic necessity has become unaffordable for many. In Inflation World, stuff only seems more expensive because the price tags keep changing. That’s inflation. In Energy Crunch World, stuff really is more expensive. I’d venture to suggest that’s not inflation — it’s much worse.The same distinction applies when things get cheaper thanks to technological progress. Music is much cheaper than it used to be, as are laptops and solar panels. And by “cheaper” I don’t mean in the almost-meaningless sense that there are fewer digits on the price tag. I mean cheaper in the only way that really matters, which is that they require fewer resources to produce and are therefore affordable in greater quantities to more people.Perhaps I am doomed to fail in my project to disentangle real price changes from inflation. The real world, of course, contains elements of both, so confusion is inevitable. We are dealing with a temporary but very painful increase in the real cost of energy and food, as in Energy Crunch World, but we have also seen loose money and broader increases in prices, as in Inflation World. But the two sources of higher prices require quite different policy responses. In Inflation World, inflation is a monetary phenomenon and needs a monetary response such as higher interest rates. In Energy Crunch World, the rise in prices needs a real-world response in the form of support for struggling households, and every effort to reduce demand and to find new sources of supply. Look around and you’ll see plenty of confusion on this point. In the US, the recently signed Inflation Reduction Act is no such thing. It promises to squeeze the price of expensive pharmaceuticals, give tax credits for low-carbon energy sources and tighten some tax loopholes. These are promising policies, but if they work they will work by improving the structure of the real economy, not by tightening monetary conditions.

The same logic applies to US proposals to toughen competition policy. If a monopoly is broken up and its fat mark-ups reduced, the result should be that prices fall and incentives to improve quality and service increase. That should mean a one-off boost in real living standards, arguably far more important than any impact on inflation. If it affects inflation at all, it will be a temporary blip — and “reduces inflation” never was, and never should be, the test of competition policy.Or consider the idea of a universal basic income. It’s often attacked on the grounds that it is inflationary, but there is nothing particularly inflationary about raising taxes and using the money to fund a basic income. The case against a basic income is nothing to do with inflation: it’s that those higher taxes plus the availability of unconditional cash might produce too much of a disincentive to work for too many people.Friedman was oversimplifying when he declared that inflation was always and everywhere a monetary phenomenon. But the statement is not far wrong and has a bracing clarity. If you try to evaluate clean energy subsidies, support for cutting edge research, competition policy or tax reform through the lens of inflation-busting, you’re missing the point. These policies stand or fall on their real-world merits. Meanwhile, the best long-run prediction of inflation is that five years out, the inflation rate will be whatever independent central banks want it to be. Even if elected governments could help, they have plenty of serious economic problems to keep them busy. Perhaps they should start there. Tim Harford’s new book is ‘How to Make the World Add Up’Follow @FTMag on Twitter to find out about our latest stories first More

Progress in offering quality education to children around the world by 2030 is falling well behind target. The proportion of students who complete lower secondary school (typically those aged 12-15 years) has been rising in recent decades, but remains a minority in poorer countries.

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Efforts to increase the proportion of children attending school have been increasing, but have often not been matched by improved learning. Many children are failing to gain basic literacy and numeracy skills — making it impossible for them to progress to secondary school, and pushing many to drop out of education. “Learning poverty” has increased during the Covid-19 pandemic, which set back children around the world — particularly those from poorer backgrounds and without access to parental support or the internet.

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Funding for education remains limited overall. Governments account for the greatest share, and those in low-income countries invest a far more modest proportion of GDP than their richer counterparts.A large share of the costs of schooling is paid by families themselves, especially in lower-income countries, which further increases inequality.

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Donor funding for education is modest and lags far behind international development assistance given for health and other sectors.

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While western businesses reel from the highest inflation experienced in decades, many of their Turkish peers, who face a rate almost 10 times higher, are taking it in their stride.The country has suffered a succession of crises in recent years, but the economy continues to grow, propped up by a mixture of cheap credit, diversification and savvy corporate management honed during episodes of turmoil in years and decades past. “It is difficult, but we have faced this in Turkey [before],” said a senior executive at one of the country’s biggest manufacturers. “Somehow we know how to support the customers, the dealer network, to continue operations in a high-inflation environment,” he added, citing how the company had managed to find a sweet spot for pricing that covered its costs without deterring customers.Charlie Robertson, chief economist at investment bank Renaissance Capital, said that Turkish corporate management teams had experienced “soft coups, violent coups, sustained triple-digit inflation and multiple currency crises” in the 25 years that he had spent following the country. “Darwin’s ‘survival of the fittest’ certainly applies in Turkey,” he said, adding that it is also buoyed by the demographic dividends of its young population and strong underlying GDP growth. The economy expanded 7.6 per cent year on year in the second quarter and 11 per cent last year. One of the many challenges for Turkish company bosses has been worker pay, given the erosion of purchasing power caused by official inflation that topped 80 per cent in August. Eurozone inflation hit a record 9.1 per cent in August.President Recep Tayyip Erdoğan is opposed to high interest rates, despite astronomical inflation © Moe Zoyari/BloombergAs price rises began to take off in the summer of last year, Mustafa Tonguç, the chief executive of DHL Express in Turkey, complied a list of the cost of 50 basic products and compared them with their equivalents in Germany in an effort to persuade bosses in the logistics provider’s headquarters to raise the wages of his 1,100 staff. He would raise them a further three times in the year ahead. “We as business can’t fix the global economy, but we can take care as much as we can of our people,” said Tonguç. “In the last 12 months, a lot of companies went bankrupt. We felt people should be assured of their job security.”Tonguç also came up with a pricing structure for customers and suppliers, which include businesses in the textiles and automotive sectors, that fixed the cost of some parts of their fees and linked others to rapidly changing inputs such as the cost of fuel and packing. His advice to western executives is: “Don’t panic, focus on productivity . . . focus on the things you can change.”Much of the Turkish business world is angry and frustrated at president Recep Tayyip Erdoğan, who is so staunchly opposed to high interest rates that he has repeatedly ordered the central bank to cut borrowing costs despite rising inflation. Still, even if his increasingly erratic economic management marks a break with the stability of his early years in power, executives say they at least have experience of dealing with high inflation and currency weakness from difficult periods in the 1980s and 1990s.The most recent sharp plunge in the lira last December, when it hit a new record low, was “not nice”, conceded Tolga Kaan Doğancıoğlu, chief executive of the Turkish bus manufacturer TEMSA. But he said that as inflation began to climb in Turkey and worldwide, his company “immediately switched gears” and decided to access the financing needed to increase production of low-margin non-electric vehicles. While conventional wisdom suggests that inflation leads to a drop in demand, Doğancıoğlu said that past crises in Turkey had often shown the opposite to occur — at least initially. The same was true in this case.“Obviously, high inflation or hyperinflation in the long run is not healthy. But there is a period a sweet spot [where] as a company, you need to take agile decisions in order to not to lose the market.” He added: “In an inflationary environment, investing early has a virtue as well.”Turkish companies more dependent on their home market have been left exposed © Yasin Akgul/AFP/Getty ImagesAs they have weathered a string of blows in recent years, Turkish groups reduced their exposure to swings in the lira by “dramatically” scaling back their dollar and euro-denominated debt and accumulating hard currency, according to Murat Üçer, an economist at the consultancy GlobalSource Partners. The deleveraging has brought their net open foreign currency position down from roughly $200bn in 2018 to about $100bn today. “This is a welcome and understandable development,” he said.Still, there are concerns about the true scale of problem loans in the banking sector as state lenders, in particular, have used cheap credit to help struggling companies stay afloat.Many of the most successful Turkish businesses — including those in the automotive, chemicals and textiles sectors — have prioritised exports, taking advantage of the weaker lira to sell their goods across the world and helping to power economic growth.It has been tougher for those heavily reliant on local sales. Fitch last month downgraded the debt rating of a string of corporates, including white goods maker Arçelik and the telecoms company Turkcell, because of their high exposure to the domestic market. The chief executive of a large retail business focused on Turkey lamented that, even if his sales grow in lira terms, the falling lira means that the profits disappear when converted into dollars. “It makes life very difficult with investors,” he said.Robertson at Renaissance warned that there was a risk that the government’s array of unorthodox measures aimed at supporting growth while also propping up the currency are putting the country’s sovereign credit rating under pressure and could eventually “come back to bite” it. He pointed to a government-backed scheme that promises to compensate savers for a slide in the exchange rate as one example.

Others praise the resilience but lament the missed opportunities for the country, where GDP per capita is down from a peak of $12,600 in 2013 to $9,600 last year — a stark illustration of the erosion of prosperity.“I worked so hard for the last 20 years only for our country to be back where it was in the 1990s,” said one senior executive at a company with interests in tourism and energy. “This country is so resilient and so dynamic that somehow most people are still standing . . . But this country could have been another South Korea. I feel very sad when I think about where it could have been compared to where it is today.” More