Aurelia Butler

The cost of living is rising at its fastest pace for 40 years and economists warn prices will increase further this autumn — with some fearing that annual inflation could hit 15 per cent.On this week’s episode, presenter Claer Barrett hears how the soaring cost of fuel, energy bills and food is causing podcast listeners to cut back in other areas to balance their budgets. As more workers threaten to strike unless their pay keeps pace with inflation, what are your chances of getting a raise — and how else could the big squeeze affect your savings, investments and the property market? Chris Giles, the FT’s economics editor, explains what’s causing the price rises and, in turn, why this is pushing up interest rates — and how effective this might be in getting inflation under control. Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, notes how all of these pressures are being reflected on world stock markets, as well as looking at strategies people are taking with cash savings and mortgages. And with talk of tax cuts dominating the race to be Britain’s next prime minister, how could higher inflation stealthily increase the amount of tax we’re paying — not to mention student loan repayments? If you would like to be a future guest on Money Clinic, email the team via [email protected] or send Claer a DM on social media — she’s @Claerb on Twitter, Instagram and TikTok.

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WASHINGTON (Reuters) – The Federal Reserve does not have adequate systems to counter a “malign” effort by China to gather inside information on the U.S. economy and monetary policy, according to a report that was prepared by Republican staff of the Senate Homeland Security Committee, and promptly rejected by the Fed as “unfair, unsubstantiated, and unverified.”The report, which was released on Tuesday, relies heavily on information provided by the U.S. central bank itself, dating back to a 2015 internal probe of what came to be known as the “P-Network,” a group of 13 people at eight regional Fed banks whose patterns of “foreign travel, emails, details in curricula vitae, and academic backgrounds” raised concerns.The Fed’s Washington-based Board of Governors and 12 quasi-independent regional banks employ thousands of economists, including many from other countries, China among them. That collaborative approach, the committee report agreed, enhances the Fed’s ability to understand the economy and make policy.The incidents cited in the document, rather than intellectual collaboration, pointed to “a sustained effort by China, over more than a decade, to gain influence over the Federal Reserve,” according to the report.It is not clear what came of it. The committee report provided detailed case studies of five individuals, four of whom continue as Fed employees, and said that, despite their connections with Chinese officials and universities, the Fed found no instances where information had been shared in violation of policies.In a letter to outgoing Sen. Rob Portman, the ranking Republican on the Homeland Security Committee, Fed Chair Jerome Powell said he had “strong concerns about assertions and implications in the report,” and detailed the background checks Fed staff undergo, and the technology used to prevent security breaches.”We would be concerned about any supportable allegation of wrongdoing, whatever the source,” Powell wrote. “In contrast, we are deeply troubled by what we believe to be the report’s unfair, unsubstantiated, and unverified insinuations about particular individual staff members.”The activities discussed in the document raised red flags, at least several years ago, inside the Fed, according to the report. U.S. central bank officials often talk about the cyber-security risks they and all financial institutions face, but have not talked about being the target of human intelligence gathering. Some staffers had kept in touch, for example, with a former regional Fed employee, identified only as “Z,” who had ties to a Chinese “talent recruitment program” used by the Communist Party of China to develop sources inside U.S. technical institutions, the report said. The recruitment programs, including the “Thousand Talents Program,” were highlighted in a prior Senate report as a key way China uses research grants, academic lecture positions, and other perks to try to learn about and export U.S. intellectual property.In this instance, the situation led Fed officials to worry “that there were organized efforts by foreign governments … to solicit Federal Reserve researchers,” the report said.One of the employees involved, the report added, “attempted to transfer large volumes of data” to an external computer, though a committee aide said it is not clear if the effort succeeded or what data was involved.One Fed staffer “provided modeling code to a Chinese university with ties to” China’s central bank, the report said, though again there was no detail on the nature of the code or whether its distribution was restricted. Powell in his letter noted the Fed’s “most important economic models” are in the public domain, available for download from the Fed’s Web site “so that people can engage with us and these models.”‘FORCIBLY DETAINED’In perhaps the bluntest incident, “a senior official at a Federal Reserve Bank” was in 2019 “forcibly detained” by Chinese officials during a trip to the country and told under threat of imprisonment that he “must cooperate … and share sensitive, non-public economic data.”The staffer reported the incident to the Fed, who reported it to the State Department and the FBI, the report stated.Still, the report argued the Fed should strengthen its counter-intelligence efforts and work more closely with agencies like the FBI.”Because we understand that some actors aim to exploit any vulnerabilities, our processes, controls and technology are robust and updated regularly,” Powell wrote. “We respectfully reject any suggestions to the contrary.” More

More tough choices beckon for Ukraine after last week’s debt restructuring highlighted the lack of urgency from Kyiv’s military backers to step in and provide the funding needed to cover a monthly $5bn budget shortfall. Kyiv last week secured preliminary agreements with bondholders and a group of western governments to push back debt repayments for two years from August 1 after calls to allies to meet the shortfall went largely unheeded. The agreements, which if signed would free up about $6bn, and were coupled with a 25 per cent devaluation of the hryvnia, ease the immediate pressure on Ukraine to honour its obligations to foreign creditors. In the view of some, they also better reflect the financial circumstances in which the war-ravaged country finds itself. “There was bewilderment among some investors as to why Ukraine had not done this already,” one foreign banker said after last week’s announcement.The sharp drop in the pegged exchange rate was designed to slow the rapid depletion of Ukraine’s foreign currency reserves. Citizens who have fled abroad have been using hryvnia bank cards to withdraw $1.5bn a month from the country at an artificially cheap rate, said Maria Repko of the Centre for Economic Strategy, a think-tank in Kyiv.But, with the restructuring providing cover for little more than a month of government spending, economists caution that Ukraine remains under severe financial strain. The war has forced Kyiv to up its monthly military spending from $250mn February to $3.3bn in May. The government, which has already imposed severe spending cuts on everyday services to cover its military bill, could be forced to take even more drastic action. “Something has to happen on the domestic side — either raising taxes or cutting spending that’s not critical,” said Yuriy Gorodnichenko, economics professor at University of California, Berkeley. “Everybody thought the war was going to end quickly . . . but it’s going to last months, if not years.” Kyiv’s room for manoeuvre is extremely tight. With all but the most essential spending cut to the bone, and VAT and customs duties on imports — suspended after Russia’s invasion — now reinstated, there are no easy options. Any further taxes on businesses would — according to Repko — risk tipping them into bankruptcy, deepening the humanitarian crisis.If sustained at its current levels, the massive rise in military spending would mean the government ran out of funds again in the autumn, she warned. Ukraine’s finance minister Sergii Marchenko has said printing money for much longer risks stoking inflation © Ministry of Finance of UkraineCredit rating agency Moody’s has forecast a budget deficit equal to 22 per cent of GDP, leaving Ukraine’s government with a financing gap of about $50bn for 2022. Most of this $50bn gap consists of the government’s budget deficit, running at $5bn a month.Without foreign financial support, Repko said Ukraine would “go into a spiral and the military effort will be impossible to maintain”. About $38bn in budgetary support has been pledged by foreign governments and multilateral agencies since Russia’s invasion in February, but only $12.7bn had been delivered by early July, according to Ukraine’s finance ministry. A further €1bn in EU funding is due by the end of the month. “The commitments are very large but the disbursements are lacking and slow,” said a foreign banker working with Kyiv.Ukraine has been burning through its foreign reserves to help finance its war effort. The central bank has also bought government bonds worth $7.7bn since the invasion, including $3.6bn last month alone — a de facto money printing exercise. Finance minister Sergii Marchenko told the Financial Times last week that it would be “very risky” to rely on money printing for much longer because it would stoke inflation, which has already doubled since the invasion to 20 per cent and is likely to climb further following the currency’s devaluation, which will raise the price of imports. Net reserves are now just $12.9bn, down from $19bn in February — enough to pay for only about two and a half months of vital imports from agricultural inputs to vehicle parts and fuel. A deal reached with Russia last week to safeguard exports of Ukrainian grains would bring in about $800mn of export earnings a month, if it holds, according to Dragon Capital in Kyiv. But the deal was in jeopardy after Russia fired missiles on the port of Odesa a day later. Viktor Szabó, an investment director at UK asset manager Abrdn, said the government’s options were very restricted. “If they burn up their reserves, they’ll have to decide whether to pay soldiers or nurses. They’ll have problems running schools and hospitals,” he said. “It’s a catastrophe.”Additional reporting by Mark Raczkiewycz in Kyiv More

The writer is professor of economics and political science at the University of California, BerkeleyThe dollar has had a spectacular run, having risen more than 10 per cent against other major currencies since the start of the year. Actually, not a few governments and central banks would prefer the adjective “disastrous” to “spectacular”. For developing countries, from Sri Lanka to Argentina, the greenback’s rise has made servicing dollar-denominated debts, already a difficult task, essentially impossible. For emerging markets such as Chile that are not heavily saddled with debts, it has raised inflation by increasing the local-currency equivalent of dollar-denominated food and energy prices. Inflation and the fall in its currency have forced the Bank of Chile to raise its policy interest rate an extraordinary nine times in the past year and now to deploy its reserves in support of the peso exchange rate. For the European Central Bank, there has been the embarrassment of seeing the euro fall to parity against the dollar. For the Bank of Japan, there is the fact that the yen has been the worst-performing advanced-country currency on the planet this year.Why the dollar has strengthened is no mystery. Seeing both high inflation and strong growth, the Federal Reserve has been raising interest rates faster than other big central banks, drawing capital flows toward the US.The ECB, despite having cautiously kicked off its tightening cycle last week, is moving noticeably more slowly. The curtailment of Russian energy supplies is already weighing on European growth, and higher interest rates would send a fragile Italian debt market reeling, given the ill-timed rise in political uncertainty in that country. The Bank of Japan, meanwhile, has no immediate reason for thinking that the country’s “lowflation” problem has been solved, and is not inclined to abandon its “yield-control” policy to keep interest rates down. Neither the BoJ nor the ECB will be matching the Fed by raising policy rates in 75 or 100 basis-point increments.

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Some will invoke the rise of geopolitical risk from the endless Russia-Ukraine war and the dollar’s status as a haven. There may be yet more haven flows with tensions around the Taiwan Strait and Iran. But at the end of the day, recent currency movements have been driven by central banks. The same will be true going forward.It is not news, admittedly, that having fallen behind the curve, the Fed is now scrambling to catch up. Thus, the expectation of further rate rises from Fed chair Jay Powell and others is already in the market. There is no reason why those additional policy rate increases should move the dollar any higher, in other words.But two additional developments complicate the exchange-market outlook. First, other central banks — the ECB and BoJ notwithstanding — are showing an increasing willingness to match the Fed in raising rates to address their own spiralling inflation problems. These already include the central banks of Canada, the Philippines, Singapore, New Zealand and South Korea, among others. The list is growing. These countries’ finances are sufficiently strong to withstand interest rate rises, and inflation is a matter of common concern. Their central banks are therefore at least keeping pace with the Fed. The dollar has consequently shown less strength against a broad basket including the currencies of these countries. The same is apt to be true in the weeks and months ahead.Second, and more ominously, there is recession risk in the US. Current dollar pricing is predicated, to repeat, on the expectation that the Fed will continue to raise rates. That expectation is based in turn on the hopeful assumption that the US economy will continue to expand. If the Fed-engineered slowdown spreads from the housing market to retail sales and business investment, the combined effect will drag down not just US spending but also inflation. The idea that, in these recessionary circumstances, inflation will remain in the high single digits and the Fed will therefore be forced to continue its tightening cycle, is quite daft. As Fed chair, Paul Volcker kept raising rates in the face of a recession — and the dollar kept soaring — because inflation remained stubbornly high for several years. There is little sign of similar inflation inertia today. So if the economy and inflation weaken, the Fed will pause, and the dollar will reverse direction. This is no longer a risk that can be dismissed. More

The use of air freight soared during the coronavirus pandemic, as shippers leapfrogged over bottlenecks plaguing surface transport networks to get their goods to free-spending consumers. Yet even as those bottlenecks start to ease, demand for planes to move cargo is still growing. The trend is squeezing shippers’ bottom lines, lifting the fortunes of airlines and boosting the most carbon-intensive form of freight transport. Global air passenger traffic is forecast to be about a fifth lower than 2019 levels in 2022, according to the International Air Transport Association. Yet air cargo volumes will be 11.7 per cent higher than in 2019, and 4 per cent more than in 2021, the airline trade group estimates. How long reliance on costly air shipments lasts has become “a multimillion-dollar question”, said Todd Ingledew, chief financial officer of luxury brand Aritzia. The Canadian company forecasts its profit margins will be as much as three percentage points lower this year than last due to higher costs from expedited air freight from overseas manufacturing sites, he told analysts earlier this month. Levi Strauss, the jeans manufacturer, said higher air freight costs “to support delivery of seasonal merchandise” took 0.8 percentage points off its gross profit margin in the latest quarter, while Lululemon Athletica’s margin guidance for its current quarter included 1.5 percentage points of “pressure from air freight costs due to port congestion and capacity constraints”. Gap took a $50mn charge from air freight this quarter, which contributed to the apparel retailer cutting its profit expectations as it ousted chief executive Sonia Syngal earlier this month. Another apparel group, PVH, took a $12mn hit in its latest quarter related to air freight. Air freight is much more carbon-intensive than shipping by sea. In 2019, ships moved nearly 350 times more cargo than planes but accounted for only five times more carbon dioxide emissions, according to the International Transport Forum.But air freight is faster and has proven more reliable than alternatives as ports have been backlogged, truck drivers have been scarce and warehouses have filled up during the pandemic. Demand lept ahead of last year’s holiday season as retailers scrambled to stock shelves. Global supply chain pressures have declined from a peak in December, but they remain historically high, according to an index published by the Federal Reserve Bank of New York. Industries such as fast fashion have long relied on air freight to keep up with the latest trends, said Zvi Schreiber, chief executive of logistics booking service Freightos. Now a wider range of companies are shipping by air: for example, the safety and technical equipment manufacturer Brady has said it shipped crucial parts by air in its latest quarter.A recent decline in the cost of air transport will provide some relief for shippers. The average shipping rate from Shanghai to the US, for example, has fallen by about 50 per cent from its peak in December, but it is still more than double 2019 levels, according to Baltic Exchange data.Even as shippers suffer, sustained demand for air freight enabled Delta Air Lines to earlier this month report its highest second-quarter cargo revenue ever, with revenue from air freight increasing 46 per cent compared to 2019. “Supply chain disruptions are still pretty significant. I don’t see them being resolved in a material way for the next 12 months,” said Ed Bastian, Delta’s chief executive. “So I think the outlook for air freight should be fairly, fairly good.”Cargo as a share of global airline revenue more than tripled between 2016 and 2021, said Marie Owens Thomsen, chief economist at IATA, though she said that the share is likely to drop as passenger demand bounces back to pre-pandemic levels. Others are also placing large bets on the elevated demand for air freight lasting. US aircraft manufacturer Boeing said it plans to increase the number of its freighters in use by 80 per cent over the next two decades. Airbus, Boeing’s main rival, plans to expand active freighters by half by 2041.The pandemic has demonstrated the “strategic importance” of air freight, said Darren Hulst, Boeing’s vice-president of commercial marketing: “This isn’t just a blip in terms of shipping versus air. They’re complementary, in many ways, but I think air has proven itself.”Ocean shipping lines are also buying into the air freight boom. Denmark-based Maersk announced a new air cargo wing in April, while France’s CMA CGM has ordered six planes for its nascent air shipping division since November 2021. “We’ve shipped things by air through this period that never used to be shipped by air,” Owens Thomsen at IATA said. “Things will normalise at some point in time.”Some US importers are betting that their need to circumvent congested shipping lanes will last well beyond the next holiday season. Harmit Singh, chief financial officer of Levi Strauss, said he expects higher air freight costs to continue until at least 2023.“We’re assuming [air freight] is going to remain where it is for the rest of the year,” Abercrombie & Fitch finance chief Scott Lipesky said during the company’s last earnings call. “A lot of us are optimistic that we’ll start to see a little bit of relief in the back half, but who knows?”Additional reporting by Steff Chávez in Chicago More

Pakistan’s central bank governor has rejected market concerns about Islamabad’s worsening liquidity crunch as “overblown” and said he expected the IMF to sign off on $1.3bn of new funding for the cash-strapped Asian country in August.Murtaza Syed also told the Financial Times that Pakistan was engaged in talks with Middle Eastern countries, such as Saudi Arabia, as well as China “to get a little bit of the extra money that we need” as it contends with rising commodity prices, falling foreign exchange reserves and a depreciating currency. “On the external debt servicing side, the next 12 months — while they look challenging — are not as dire as I think some people make them out to be,” Syed said. “Especially as we have the cover of the IMF programme during what is going to be a very difficult 12 months globally.” Sri Lanka’s default on its foreign debt in May has stoked fears over the risk of defaults in other emerging economies. The Pakistani rupee lost more than 7 per cent of its value against the US dollar last week, the steepest weekly drop since 1998, after a regional poll victory for Imran Khan, who was ousted as prime minister just a few months ago.Pakistan’s widening current account deficit has drained its foreign exchange reserves, which have fallen by $7bn since February to just over $9bn in July, Syed said, equivalent to a month and a half of imports. Fitch Ratings revised its outlook for the country to negative from stable last week because of what it called “significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022”.However, Syed, who worked for the IMF for 16 years, said Pakistan’s debt vulnerability could not be compared with Sri Lanka’s problems. “Those fears are overblown and in fact, Pakistan is not in that very bad category of countries,” he said. Unlike Sri Lanka’s tourism-reliant economy, he said, Pakistan “had a pretty good Covid”, with a milder economic contraction and stronger recovery than its smaller neighbour.While Sri Lanka owes about 40 per cent of its debt to commercial lenders, most of Pakistan’s debt is owed to multilateral institutions and bilateral lenders, he added. “We have external financing needs of about $34bn in the next 12 months and we have financing already identified because of the IMF programme of over $35bn,” he said. “So we are over-financed, actually.”Syed said that he expected the next $1.3bn IMF disbursement from its $7bn facility to be approved in August, though this might be complicated by summer holidays. “We are trying to push for it sooner rather than later,” he said.

An analyst said that although Sri Lanka’s economic situation was worse than Pakistan’s, in Colombo, political risk was waning but in Islamabad it was deteriorating. “In Sri Lanka, the crisis is so immediate and so bad, there is broad consensus in the political class on what has to happen,” said Eurasia Group’s Peter Mumford. “If Sharif or Khan is prime minister, there will be differences in fiscal policies that would affect the viability of an IMF programme.”Khan’s upset victory last week in Punjab, the country’s largest province, has raised the likelihood of an early election that could unseat Shehbaz Sharif’s government.However, Syed said that his “strong baseline” was that the Sharif government would remain in power. Even in the “hypothetical” event of an early election, he added, the IMF had a history of proceeding with programmes with caretaker governments. “I think there is wide recognition across the political spectrum that the next 12 months are going to be hard for emerging markets and are going to be hard for Pakistan, too,” he said. Twitter: @JohnReedwrites More

TOKYO (Reuters) -Bank of Japan policymakers saw wage hikes as key to sustainably achieve their 2% inflation target, minutes of the June meeting showed, underscoring the bank’s resolve to keep interest rates ultra-low despite growing signs of price pressure.Some in the nine-member board saw price rises broadening and leading to changes in long-held public perceptions that inflation and wages would not rise much in the future, according to the minutes released on Tuesday.But the members agreed the economy needed massive monetary support to weather the hit from rising commodity prices and supply disruptions caused by China’s COVID-19 lockdowns.”The board agreed that uncertainty surrounding Japan’s economy was extremely high,” the minutes showed.”Many members spoke about the importance of wage increases from the perspective of achieving the BOJ’s price target in a sustained and stable fashion.”At the June meeting, the BOJ maintained ultra-low interest rates and vowed to defend its cap on bond yields with unlimited buying, bucking a global wave of monetary tightening in a show of resolve to focus on supporting a tepid recovery.”Japan must create a resilient economy at which consumption continues to rise even when companies raise prices,” one board member was quoted as saying.”The BOJ must maintain monetary easing until wage hikes become a trend, and help Japan achieve the bank’s price target sustainably and stably,” another member said.Japan’s core consumer prices rose 2.2% in June from a year earlier, exceeding the BOJ’s target, due mostly to surging fuel and commodity costs blamed on the war in Ukraine.The rising cost of living is causing particular pain to households, as companies remain reluctant to hike wages due to uncertainty about their business outlook.Inflation-adjusted real wages, a key gauge of consumers’ purchasing power, fell 1.8% from a year earlier, extending a decline to post the biggest year-on-year drop in nearly two years. More

SEOUL (Reuters) -South Korean economic growth unexpectedly picked up in the second quarter as strong consumption on eased COVID-19 restrictions offset poor exports, supporting the case for further central bank interest rate hikes.The Bank of Korea estimated on Tuesday gross domestic product for the April-June period rose 0.7% quarter-on-quarter, faster than the 0.6% growth in the first quarter and above a 0.4% rise tipped in a Reuters survey.Economists said the upbeat data allowed the central bank, which this month delivered an unprecedented 50 basis-point rate hike, to continue tightening policy in coming months.”The economy will inevitably slow due to prolonged inflation and cooling exports, but today’s solid readings are a good boost for the central bank seeing inflation as the prime risk for now,” said Chun Kyu-yeon, economist at Hana Financial Investment.The BOK has raised the policy interest rate by a combined 1.75 percentage points to 2.25% from record-low 0.5% since August last year, with economists predicting rates to be at 2.75% by the end of this year. The bank holds its next policy meeting on Aug. 25.Private consumption jumped 3.0%, the best in a year, after a 0.5% decline in the first quarter as the government in April removed almost all COVID-19 social-distancing restrictions.The strong consumption comes despite the BOK’s aggressive series of interest rate hikes since August last year.The economy also received a boost from increased government spending after the parliament approved a 62 trillion won ($47.33 billion) supplementary budget weeks after President Yoon Suk-yeol took office in early May.However, exports and corporate spending on production facilities slumped amid a slowing Chinese economy and the fallout from a war in Ukraine as well as a global wave of monetary policy tightening to fight inflation.Exports shrank 3.1% in the April-June period from the preceding quarter, the largest decline in two years. Capital investment dropped for a fourth consecutive quarter by 1.0% following a 3.9% contraction in the January-March period.Asia’s fourth-largest economy grew 2.9% in the second quarter year-on-year, faster than analyst expectations for 2.5% growth but slower than 3.0% growth in the first quarter. ($1 = 1,309.8700 won) More