Aurelia Butler

Stocks were mixed, oil prices fell and the dollar pushed higher on Thursday, as investors questioned what red-hot inflation figures released on Wednesday would mean for US interest rate rises when the Federal Reserve meets later this month. Wall Street’s S&P 500 ended the day down 0.3 per cent, extending losses from the previous session, while the technology-heavy Nasdaq Composite closed flat on the day. In Europe, the regional Stoxx 600 closed down 1.5 per cent.US consumer prices increased at their fastest clip in 40 years last month, a report from the Bureau of Labor Statistics showed on Wednesday, with the annual rate of inflation topping economists’ forecasts to hit 9.1 per cent.The data had initially fuelled expectations of a much larger interest rate rise from the Fed at its July meeting, but those forecasts faded in afternoon trade after Fed governor Christopher Waller on Thursday reiterated his support for a three-quarter percentage point increase.Before Waller’s comments, investors in the futures market had priced in over an 80 per cent chance that the Fed would deliver its first 1 percentage point interest rate increase since the central bank consistently began using the federal funds rate as its primary policy tool in the early 1990s. By the end of Thursday, those expectations were around 40 per cent. The fall in rate increase predictions pulled the two-year Treasury yield slightly lower, down 0.01 percentage points to 3.13 per cent. The yield, which moves with policy expectations, on Wednesday had risen to its highest level since mid-June. Investors are still pricing in a mammoth 0.75 percentage point increase, which could slow the economy enough to tip it into recession. “This is not just about inflation,” said Salman Ahmed, global head of macro and strategic allocation at Fidelity International. “There’s a significant slowdown in the pipeline. We think this growth slowdown will turn into a recession.”Concerns over the health of the global economy drove investors into the dollar, traditionally seen as a haven in times of stress. The dollar index, which measures the US currency against a basket of six others, rose 0.4 per cent. That spelt further pain for the euro, which fell 0.4 per cent to trade just above $1. The common currency had on Wednesday weakened to parity with the greenback for the first time in 20 years. The Japanese yen also lost more than 1 per cent to hit a 24-year low of ¥139.39. Fears of an economic slowdown hit oil prices earlier in the day, with the price of Brent crude slipping as much as 5.1 per cent to $94.50 a barrel — taking the international oil benchmark back to levels last seen before Russia’s invasion of Ukraine in late February. But Brent later reversed much of those declines to settle down 0.47 per cent on the day at $99.10. More

A top official at the Federal Reserve has left the door open for the US central bank to raise interest rates by a full percentage point at the end of this month if warranted by incoming data.Fed governor Christopher Waller on Thursday reiterated his support for a three-quarter percentage point increase at the July gathering of the Federal Open Market Committee, but indicated that he was open to a larger move.“My base case for July depends on incoming data. We have important data releases on retail sales and housing coming in before the July meeting,” he said at an event hosted by the Global Interdependence Center. “If that data comes in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” he added.Waller’s comments come just one day after an alarming US inflation report, which showed consumer price growth had accelerated to a new 40-year high of 9.1 per cent in June.The data, which Waller said were a “major league disappointment”, also showed a worrying uptick in “core” inflation, which strips out volatile items such as energy and food. The increase was led by rising rents and other shelter-related costs as well as services inflation.Further evidence that inflation is at greater risk of becoming entrenched raised market expectations of a 1 percentage point interest rate increase at this month’s meeting. Prior to Waller’s comments on Thursday morning, investors in the futures market were pricing in over an 80 per cent chance that the Fed would increase interest rates by a full point, up from a roughly 0 per cent chance last week. The expectations receded following his remarks, with Waller noting that market participants had been “getting ahead of themselves”. The futures market is now pricing in a 40 per cent chance that the Fed will deliver its first 1 percentage point interest rate increase since the central bank consistently began using the federal funds rate as its primary policy tool in the early 1990s.In a discussion that followed his speech, Waller indicated that a 0.75 percentage point rate rise was the bare minimum the Fed should do, acknowledging that such an adjustment was “huge”.“Don’t think that if you’re not going 100, you’re not doing your job,” he added. Not a single Fed official has formally endorsed a full percentage point rate rise yet, but importantly none have ruled out such a possibility.Loretta Mester, president of the Cleveland Fed and a voting member on the FOMC, said on Wednesday that she was watching incoming data before drawing conclusions.“We don’t have to make that decision today,” she said when asked in an interview with Bloomberg.Raphael Bostic, president of the Atlanta Fed, meanwhile said “everything is in play” following the “concerning” inflation report.However, James Bullard, the hawkish president from St Louis, said that a 0.75 percentage point move “has a lot of virtue to it”, noting that an increase of such a size would bring the federal funds rate to a level in line with long-term estimates of neutral — a threshold that neither stimulates nor restricts economic activity when inflation is running at 2 per cent.

The Fed is chiefly concerned that elevated inflation will feed through to a dangerous cycle in which expectations of future price increases get out of control — a risk Waller spoke to directly on Thursday.“We want to reduce excessive inflation, whatever the source, in part because whether it comes from supply or demand high inflation can push up longer-run inflation expectations and thus affect spending and pricing decisions in the near term,” he said. “These decisions can then push up prices even more and make inflation harder to get under control.”Waller said he therefore endorsed further rate rises until a “significant moderation” in core inflation occurred.Additional reporting by Adam Samson in London More

This week, yet more eye-popping economic data has emerged. Take inflation. On Wednesday, it emerged that US annual inflation hit 9.1 per cent in June, the highest level since 1981.Unsurprisingly, that has raised expectations of increasingly sharp future rises in interest rates. This, in turn, is prompting bodies such as the IMF to slash growth projections, in the US and elsewhere. But while investors and economists worry about recession, there is another related question to ponder: how will high inflation and rising rates affect the world’s growing mountain of debt?During most of the past ten years, this debt question has often been ignored by pundits, because a multi-decade decline in rates and inflation kept borrowers’ servicing costs low, or falling. But Wednesday’s number underscores that the climate has changed. Debt data is just as eye-popping as inflation. A recent report from JPMorgan, which crunches statistics from The Institute of International Finance, starkly details the issue. It notes that total global debt was 352 per cent of gross domestic product in the first quarter of this year, with private sector debt accounting for two-thirds of this, and public sector debt one-third. The good news is that this ratio has declined slightly from a peak of 366 per cent in early 2021, due to strong global growth. The bad news, however, is that the current ratio is still 28 percentage points above 2019 levels, before Covid-19 lockdowns sparked frenetic government and private sector borrowing. Moreover, the pandemic-era increase was broad-based and came after a large jump in debt during the 2008 global financial crisis — and the former was considerably bigger than the latter. Thus, total global debt today, relative to GDP, is more than double its 2006 level — and triple the 2000 ratio (when it was under 100 per cent). Yes, you read that right: leverage in the global economic system has risen more than three-fold this century; and the only reason that this went (mostly) unnoticed was sinking interest rates. So what happens now if rates increase? No one knows. If you want to be optimistic, you might argue that there is no need to panic since spiralling debt is a feature of an increasingly sophisticated globally integrated world, not a bug. Just as 21st-century consumers often use credit cards instead of cash for shopping, which makes consumer debt seem bigger than before even if retail spending is unchanged, corporate activity today is powered by evermore complex credit flows. Inside headline gross debt numbers there are also credit flows that sometimes cancel each other out, and the rising value of liabilities is sometimes matched by rising asset values. Thus, while Japan has the world’s highest debt-to-GDP ratio, different government agencies owe debt to each other. And while China’s private sector debt is almost three times GDP, the deep-pocketed government is implicitly backing some loans. Similarly, while the US also has debt three times the size of GDP, this borrowing is partly offset by the rising values of private and publicly held assets. “The total increase in gross debt might overstate the rise in debt vulnerabilities,” a recent report from the Committee on the Global Financial System notes. It adds that any “analysis of distributions [of vulnerabilities] requires micro data, which are often not available from public sources”. The nature of creditors, value of offsetting assets and maturity of the debt matters.Nevertheless, even with these caveats, the trend is clearly worrying the CGFS — so much so that its report uses central banks’ internal data to try to model some of the private sector “vulnerabilities”. This produces a smorgasbord of striking micro data. To cite one example: while 50 per cent of the pandemic-era debt assumed by companies in Italy and Spain is coming due in the next couple of years (making them vulnerable to rising rates), in Germany and America the ratio is just 25 per cent.Or, to cite another: the CGFS calculates that 17 per cent of companies in industrialised economies are “zombies”, or entities that can only be kept alive by virtue of low rates; in 2006 this ratio was 10 per cent. A third nugget: some 90 per cent of German households expect house prices to keep rising, up from 40 per cent in early 2020 — a pattern that may “amplify the current upswing in household credit”, the CGFS says.These details suggest that rising rates will create plenty of mini debt shocks in the coming years. Indeed, these are already erupting: in the sovereign sector (say, with Sri Lanka); the western corporate world (with Scandinavian Airlines or Revlon); and the emerging markets corporate sphere (in cases such as China’s Evergrande)But the really fascinating question is the bigger one: can a thrice-leveraged system ever really deleverage, without suffering a full-blown crisis (that is, mass default)? After all, growth is unlikely to provide an exit route. And while inflation is “a potential route for reducing debt relative to GDP”, as the JPMorgan report notes, that only works if inflation “is unanticipated and does not drive up interest rates”. Therein lies the challenge for central bankers — and the huge philosophical question hanging over our 21st-century global economic [email protected] More

It is still possible that the US economy will manage a “soft landing” — taming its inflation problem and getting the economy back to robust growth without too much pain. But as the weeks go by, the case for consumers and investors to start buckling up and bracing for a bumpier impact gets ever stronger. This week, consumer price inflation was revealed to have hit 9.1 per cent — a 40-year high, above and beyond the consensus view. Within that, energy prices have risen by 42 per cent, with food up by 10 per cent. But this is not a story of a few volatile commodities: core inflation, which excludes those categories, is up by 5.9 per cent on the year.From here, the Federal Reserve’s decision seems straightforward: raise rates rapidly. After all, inflation is high and unemployment is low — at just 3.6 per cent. The Bank of Canada — facing a similar position, with very high inflation and record low unemployment — hiked rates this week by 1 percentage point, up to 2.5 per cent. Market prices imply investors expect the Fed may follow by raising rates by a similar amount at their next meeting at the end of July — perhaps raising it by as much as 1 percentage point, too. Investors expect rates to get to a level of about 3.5 per cent by the end of this year — a level at which monetary policy is expected to dampen activity. The case for rapid hikes now is not really about the latest numbers. It is certainly too late to affect inflation in the past. And, as Joe Biden stated in his response to the figures, it is “also out of date” in another sense. Many pressures visible in the numbers are abating, as commodity prices have come down. One key reason for rate rises now is, as the Bank of Canada put it, “to break the vicious circle . . . to re-anchor long-term inflation expectations”. Fundamentally, inflation has run out of control. People negotiating pay packets and setting menu prices will — rightly — be suspicious about assurances that inflation will return to moderate levels soon. The Fed’s task is to persuade them that next year will be different. There is risk here. Interest rate rises work by crunching demand; they kill businesses and induce job losses. It is possible that rapid rate rises could unnecessarily induce or worsen a recession that some data suggests is coming anyway. In such a scenario, tightening may simply deepen a slowdown that was going to do the work of taming inflation. In addition, expectations do not appear to be unanchored and wage growth is slowing. There is a danger that supporting big rises now may be to call for a medicine that is worse than the disease. But there is peril on the other side, too: being too slow would mean inflation being allowed to fully embed itself. And it is easier to reverse course by loosening monetary policy than it is to bear down on an inflationary problem that has seeped into the groundwater. Medium-term inflation expectations may still be anchored, but we cannot wait for them to come unmoored before we act. The Fed’s next forecasts are expected to be glummer than the last. But last time around, they still anticipated continued growth and continued low unemployment even as they raised rates. There is not any expectation of a coming brutal crash. Investors have spent much of this week puzzling over what this all means — edging up predictions for the future path of interest rates and for the chances of recession. But there is good news in some of it — it is hard to read the markets’ responses as indicating that investors think this ultra-high inflation is now a permanent feature of American life. The Fed has credibility. But it still needs to tighten further to justify that faith. More

Pakistani prime minister Shehbaz Sharif on Thursday hailed a deal with the IMF that paves the way for the release of $1.2bn to the south Asian nation as it seeks to avert a balance of payments crisis.Resumption of the stalled IMF lending package has been seen as vital to open the way for funding from other multilateral and bilateral lenders to Pakistan. The IMF said the staff-level agreement would also increase the total size of the package to $7bn from the $6bn originally agreed in 2019. “The agreement with the fund has set the stage to bring [the] country out of economic difficulties,” Sharif said in a tweet.A senior Pakistani government official said the IMF’s board of executive directors was expected to approve the agreement in September. News of the deal eased concerns in Pakistan that it might suffer the same fate as Sri Lanka, where a debt crisis has unleashed political turmoil that has forced president Gotabaya Rajapaksa to flee the country. In recent weeks Pakistan’s liquid foreign currency reserves have sunk to the equivalent of less than two months of imports, while the rupee has fallen against foreign currencies amid a widening trade deficit fuelled by the rising cost of oil and other commodities. “Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels,” the IMF said in a statement announcing the deal. “The resultant economic overheating led to large fiscal and external deficits in fiscal year 2022, contributed to rising inflation and eroded reserve buffers,” the fund said. Pakistan’s KSE 100 shares index rose 1.2 per cent after the news of the deal on Thursday.Analysts warned that Sharif’s government faced a difficult political test in implementing IMF-driven belt-tightening in the run-up to parliamentary elections due by summer 2023. Lower- and middle-income voters have already been stung by rising inflation. Fuel prices have almost doubled in the past quarter, while electricity and gas tariffs have been raised. Sakib Sherani, a former adviser to the finance ministry, said Pakistan’s return to an IMF programme “distances the country from a Sri Lanka-type situation”. But he warned that the likely increased difficulty of providing a safety net for low-income people was one of “several undesirable consequences” of the deal.The central bank this month raised its interest rate to 15 per cent, more than twice the level just 10 months ago, to combat inflation, which rose to 21.3 per cent in June. Last month, Pakistan imposed a one-off 10 per cent “super tax” on important industries in order to narrow the fiscal deficit. Business leaders warned that Pakistan still faces severe economic strains.“With interest rates as high as where they are right now, how can anyone sensibly borrow and run a business successfully? I expect rising unemployment and more poverty,” said the president of a private bank.

Western diplomats said Pakistan had failed repeatedly to plug gaps in its fiscal framework. For example, it had not increased the proportion of the population who pay income tax from the current less than 2 per cent. “With tax evasion so widespread, you can’t put Pakistan on the same path as other success stories like the economies of south-east Asia,” said one western official. “This bailout might save Pakistan from a default, but a lot more needs to be done to stabilise the economy to benefit ordinary people.” More

School caterers in England are cutting food standards due to rising living costs and continuing supply chain pressures, according to new research, with the poorest families hit hardest. In a survey commissioned by the Soil Association, a food health charity, 47 per cent of school meal providers said they were worried they would be unable to meet legally mandated food requirements if the economic situation did not improve.About 13 per cent of caterers questioned last month by the Soil Association said they had already fallen short of food standards, prompting health experts to warn that lower nutrition levels could adversely impact pupil wellbeing.“It has real implications for children,” said Rob Percival, head of policy at the Soil Association. “The school foods standards have been carefully calibrated to ensure that across the space of a week they provide a healthy balanced diet . . . for many [children a hot lunch] in the middle of the day is the only healthy meal they have.” Zoe Griffiths, a nutritionist and founder of ZG Nutrition, said falling short of standards could mean children did not receive enough nutrients to grow and stay healthy, and raise the fat, sugar and salt content of catered meals.Children enjoy their lunch at the Ben Jonson primary school in Tower Hamlets, London © Charlie Bibby/FT“Many children rely on their school meal as their only meal of the day,” she said. “Children living in food insecurity could show signs of malnutrition. They will also experience social stigma and it can impact on mental health . . . concentration and behaviour in school.”At Ben Jonson primary school in Tower Hamlets, meals for about 600 children are cooked on site as part of the inner London council’s catering operation, which prepares 16,500 meals every day for sites across the borough. Lamb has recently been taken off the menu as it is too expensive, said the catering team — one of several workarounds they have had to introduce to meet demand as school budget tightens. Other cost-saving measures, said caterers, include sneaking greens into burgers, by cutting their meat content from 80 per cent to 50 per cent, serving smaller portions and using more raw ingredients.Pauline Gati: ‘I’m always in trouble for the cost’ © Charlie Bibby/FT“Substitutions are happening all the time,” kitchen manager Pauline Gati said. “We [are] using less meat . . . but that doesn’t mean it’s cheaper [to prepare meals]. I’m always in trouble for the cost.”Aoife Wycherley, head of supply chain and food procurement at Sodexo, a multinational catering management company, said the UK catering industry faced the “significant” twin challenges of inflation and disruption to supply chains due to the Covid-19 pandemic and war in Ukraine.According to a new survey by Sodexo of more than 250 food buyers, 35 per cent said they would have to continue raising food prices to manage difficulties in their supply changes. The companies said that labour shortages, disruptions to freight routes and an over-reliance on imports were all contributing to uncertainty among food suppliers. Some 80 per cent reported that their customers were considering using cheaper ingredients or smaller portions to cope with rising food costs.Meanwhile, some schools have said they have been absorbing rising costs. Simon Kidwell, a primary school headteacher in Cheshire, north-west England, said the expense of serving breakfast and after-school clubs had risen 14 per cent in the past year. “We are holding off passing on the cost to parents who in many cases are just about managing,” he said.Catering staff dish up meals at Ben Jonson primary school © Charlie Bibby/FTThe government recently committed additional funding for the provision of school meals but charities say it does not go far enough. Last month, ministers announced that funding for meals for 4- to 7-year-olds, who in England receive free school lunches, would increase from £2.34 to £2.41 a meal. But the Soil Association called the increase “miserly” after inflation reached a 40-year high of 9.1 per cent in May. As the cost of living crisis pushes more families into food poverty, some caterers are anxious that parents will be less able to afford school meals.Anna Taylor, director of the Food Foundation, said the charity was worried about children whose families could not afford the £2.50 or so a day for a meal and were instead opting for nutritionally limited packed lunches.Children qualify for free school meals if their family income is below £7,400 a year after tax and before benefits are taken into account. The Child Poverty Action Group, a charity, estimated that one-third of children living in poverty in England — about 800,000 — are not currently eligible for free meals. Naomi Duncan, chief executive of Chefs in Schools, a company that provides bespoke menus for schools, said pupils would benefit from having cooks who could adapt creatively to the changing economic situation.

She said their kitchens needed about 70-75 per cent take-up to break even. “A half-empty restaurant doesn’t pay the bills.” The government said that schools were “responsible for providing nutritious school meals” by contracting caterers from their core funding, which had increased £4bn in cash terms compared with last year. It added that schools had flexibility in how to meet food standards. “If a particular product is not readily available for any reason, the standards give . . . caterers the freedom to substitute in similar foods.” More