Aurelia Butler

WASHINGTON (Reuters) – U.S. consumer price growth slowed sharply in April as gasoline prices eased off record highs, suggesting that inflation has probably peaked, though it is likely to stay hot for a while and keep the Federal Reserve’s foot on the brakes to cool demand. The consumer price index rose 0.3% last month, the smallest gain since last August, the Labor Department said on Wednesday. That stood in sharp contrast to the 1.2% month-to-month surge in the CPI in March, which was the largest advance since September 2005. But the deceleration in the CPI is probably temporary. Gasoline prices, which accounted for most of the pull back in the monthly inflation rate, are rising again and were about $4.161 per gallon early this week after dipping below $4 in April, according to the Energy Information Administration. Russia’s unprovoked war against Ukraine is the main catalyst for the surge in gasoline prices. The war has also driven up global good prices. Inflation was already a problem before Moscow’s Feb. 24 invasion of Ukraine because of stretched global supply chains as economies emerged from the COVID-19 pandemic after governments around the world injected large amounts of money in pandemic relief and central banks slashed interest rates. President Joe Biden on Tuesday acknowledged the pain that high inflation was inflicting on American families and said bringing prices down “is my top domestic priority.”The Fed last week raised its policy interest rate by half a percentage point, the biggest hike in 22 years, and said it would begin trimming its bond holdings next month. The U.S. central bank started raising rates in March.In the 12 months through April, the CPI increased 8.3%. While that was the first deceleration in the annual CPI since last August, it marked the seventh straight month of increases in excess of 6%. The CPI shot up 8.5% in March, the largest year-on-year gain since December 1981.Economists polled by Reuters had forecast consumer prices gaining 0.2% in April and rising 8.1% year-on-year.While monthly inflation will likely pickup, annual readings are likely to subside further as last year’s large increases fall out of the calculation, but remaining above the Fed’s 2% target at least through 2023. China’s zero tolerance COVID-19 policy is seen putting more strain on global supply chains, driving up goods prices. Prices for services like air travel and hotel accommodation are also seen keeping inflation elevated amid both strong demand over the summer and a shortage of workers.Solid gains in rents, airline fares and new motor vehicle prices boosted underlying inflation last month. Excluding the volatile food and energy components, the CPI picked up 0.6% after rising 0.3% in March. The so-called core CPI increased 6.2% in the 12-months through April. That followed a 6.5% jump in March, which was largest gain since August 1982. More

US consumer price growth remained at a four-decade high in April, despite the first moderation in the annual pace in eight months, underscoring the urgency of the Federal Reserve’s push to stamp out inflation. The consumer price index rose at an annual pace of 8.3 per cent last month, a step down from the 8.5 per cent increase recorded in March, but slightly above economists’ expectations of 8.1 per cent.Prices climbed another 0.3 per cent from the previous month, slower than the 1.2 per cent rise recorded in March that was fuelled by soaring energy and food costs tied to Russia’s invasion of Ukraine. Stripping out volatile items like food and energy, however, the monthly rise in core CPI increased at a faster pace than the previous month, at 0.6 per cent compared to 0.3 per cent in March. On an annual basis, that amounted to a 6.2 per cent increase.The data, published by the Bureau of Labor Statistics, may represent the beginning of a peak in the coronavirus pandemic-era inflation surge caused by red-hot consumer demand coupled with severe supply chain bottlenecks. Economists broadly expect the pace of consumer price growth to moderate further from these levels as the immediate effects of the war in Ukraine abate. The headline annual inflation reading should also start to fall in the coming months as it starts being compared to the very elevated levels logged last year. However, evidence that price pressures are no longer a phenomenon exclusive to sectors most affected by pandemic-related disruptions — but rather a broad-based trend affecting all sectors — has stoked concerns that inflation is becoming a persistent problem. US president Joe Biden on Tuesday stressed that fighting inflation was his administration’s “top economic challenge” as he voiced support for the Fed’s efforts to tame inflation.The Fed has ramped up its efforts to contain price pressures, implementing its first half-point rate rise in more than two decades this month. Further such increases are expected in June and July, and potentially even September, with the federal funds rate expected to reach 2.7 per cent by the end of the year. The Fed’s reduction of its $9tn balance sheet will also commence in June, the second of two levers the Fed is using to cool down the economy. The key question for investors is whether the US central bank can bring down inflation without causing a recession. John Williams, the president of the New York Fed, said this week the challenge of engineering a soft landing would be difficult but “not insurmountable”. Financial markets have gyrated wildly in recent days, with equity markets registering steep losses and US borrowing cost marching higher. The 10-year Treasury yield now hovers around 3 per cent, roughly double its 1.5 per cent level at the start of the year. More

(Reuters) – Online prices fell 0.5% in April and U.S. consumers pulled back on electronic commerce, possibly reflecting a change in consumer behavior and the Federal Reserve’s efforts to curb inflation, tech firm Adobe (NASDAQ:ADBE), which monitors online prices, reported.A surge of inflation during the pandemic reversed years in which electronic commerce had helped hold overall inflation lower.Some relief may be coming, the tech firm reported. The decline in April compared to a record 0.3% increase in March. On a year-over-year basis, inflation for the 100 million goods monitored by Adobe fell to 2.9% in April versus 3.6% in March.Online sales fell to $77.8 billion in April from around $83 billion in March.”As the cost of borrowing and economic uncertainty rises for consumers, we are beginning to see the early impact on bothonline inflation and spend,” said Patrick Brown, vice president of growth marketing and insights at Adobe.The Fed is raising interest rates to try to slow demand for goods and services and, over time, to moderate the pace of price increases.New government data on consumer prices will be released at 8:30 a.m. ET (1230 GMT). More

“The Monetary Council would continue the cycle of interest rate hikes until the outlook for inflation stabilised around the central bank target and inflation risks became evenly balanced on the horizon of monetary policy,” it said.The next regular policy meeting is due on May 31. More

European firms get 70-80% of their financing from bank loans and the rest from securities, making them vulnerable when banks are less forthcoming with lending or during a banking crisis. “By making new equity tax-deductible, just as debt is at present, this proposal reduces the incentive to add to (companies’) borrowing and allows them to make financing decisions based on commercial considerations alone,” Commission Vice President Valdis Dombrovskis said.The total debt of corporations in the European Union was 14.9 trillion euros in 2020 or 111% of EU gross domestic product.In the United States, the corporate financing proportions are reversed and the EU is striving for that under its capital markets union project to increase non-bank financing for firms.”Our proposal will help companies build up more solid capital, making them less vulnerable and more likely to invest and take risks,” EU Economic Commissioner Paolo Gentiloni said.The Commission expects the combined approach of equity allowance and limited interest deduction on debt to boost investments by 0.26% of GDP and GDP itself by 0.018%.Under the Commission proposal the tax deduction would be made on the difference between net equity at the end of the tax year and net equity at the end of the previous tax year, multiplied by a notional interest rate. The allowance on equity would be deductible for 10 consecutive tax years, as long as it did not exceed 30% of the company’s taxable income.The proposal will now have to be agreed with EU governments and the European Parliament before it becomes law. More

“There is only one bill that matters and that’s the finance bill”, says a former minister about Tuesday’s Queen’s Speech. The government’s legislative programme has a mix of good ideas, bad ideas and some which might prove valuable in the future. What it does not have is anything to restore Tory electoral fortunes. In fairness, these occasions rarely move the dial. But this one has been used by Boris Johnson’s Downing Street team to fortify his position by sharpening political dividing lines with so-called “wedge issues” which animate activists and appeal to the Brexit voters. Measures that alienate supporters or with little political punch, such as audit reform, have been diluted or delayed in favour of “red meat” legislation. The need for a new approach was amplified by last week’s local elections, which saw heavy Tory losses to the Liberal Democrats and, to a lesser extent, Labour, in the south of England. The temptation is to double down on cultural divides, new Brexit conflicts and strong policies on crime, immigration and public order. The flaw with this plan is that it does not address the issues which caused the defeats: the cost of living crisis and the fact that “partygate” has made Johnson a drag on the Tory vote.A further weakness is that the losses have revived fears about the southern “blue wall”, the theoretical obverse to the northern “red wall” Leave-voting seats the Tories won from Labour in 2019. The pollster Steve Akehurst defines the blue wall as 41 seats held by the Tories since 2010, with majorities below 10,000 and where Labour has outperformed the national swing. These are largely Remain-voting constituencies, some of which have seen an influx of younger families fleeing cities to find affordable homes. While accepting that some areas like Worthing and Woking may be susceptible over time, leaders dispute the notion of the home counties as a hotbed of liberalism. They say private polling shows wedge policies are popular with southern Tories too. Yet as the ex-minister suggests, this misses the bigger picture, which holds from blue wall to red. Polling shows no issues have close to the same salience for voters as inflation and the economy. The analysis is shared by one cabinet member. “What matters is whether we can get back to a low tax, higher growth economy. Rishi and Boris assure us that what’s happening now is only temporary and normal service will soon be restored. We await with anticipation.” One southern Tory goes further: “The problem with wedge issues is you end up doing trivial things, like privatising Channel 4, and everyone asks ‘why doesn’t the government care about the things I care about?’” The MP adds: “In Kent, Surrey, Sussex, people are mildly disgusted with partygate but they want order and competence and this government radiates incompetence.” The limited help offered in the chancellor Rishi Sunak’s Spring Statement left Tory MPs in despair.Southern focus groups show the cost of living and housing as pivotal issues. Yet households struggling with bills are told to wait for the autumn budget. Planning reforms to force the promised raft of housebuilding have been curtailed to quell local opposition. This is self-defeating: home ownership, on which the Tory vote relies, has been falling among the under-45s. There is no coherent plan to grow an economy weakened by Brexit and by inconsistency over taxes and trade. Ambitions on levelling up and energy security face doubts over delivery amid internal disputes. In as far as the Queen’s Speech offers an economic direction, it is away from interventionism and towards long-term supply-side reforms and deregulation. While other issues may cheer activists, they are a sideshow. The overwhelming political imperative is inflation and the need to put more money in people’s pockets. Yet the instinctive but unstated Treasury strategy for tackling inflation is a period of depressed spending, hence the desire to wait even as fears turn from inflation to stagflation. Public services, notably the NHS, are struggling to recover from the pandemic and meanwhile see their budgets eroded by rising prices.On top of this, in the words of James Johnson, a Conservative pollster, the leader is toxifying the party. “As long as Boris Johnson is the messenger, voters won’t listen” he says. James Frayne, another favoured pollster, writes that while Labour’s weakness keeps the Tories competitive “another Conservative leader might do a lot better”.So if Johnson seeks a meaningful tactic he has only one option, income tax cuts. It will cheer his MPs. It is even a good idea. Extra energy subsidies or welfare are useful but not policies where he can outbid the opposition.Tax cuts might also restore what was once a Conservative selling point — until Sunak raised the burden to levels not seen since the 1950s. It is not a complete plan, far less an economic strategy. But if Johnson wants impact on an issue that speaks to voters real concerns, tax cuts large enough to draw a dividing line with Labour are the best bet. So the cuts are coming. Johnson is planning them even as he stresses the limits of government help. Labour has already demanded a mini-budget and many Tories are uneasy waiting until voters are feeling even more pain. As the economic and political pressure mounts many wonder if Johnson’s nerve can hold till the [email protected] More

On both sides of the Atlantic, central bankers are faced with the unenviable task of hiking rates into a possible recession. The higher rates go, the greater the risk that the Federal Reserve and the Bank of England control inflation at the expense of jobs. There is, however, a (partial) solution: using their bloated balance sheets — swelled by financial crisis and pandemic crash-fighting as an alternative to blunt interest rate increases.After all, quantitative easing was used to stimulate economic conditions after the financial crisis and the pandemic. So why not actively use the balance sheet now as a means of tightening things? It might result in price stability with lower short term rates than would otherwise be the case. Interestingly, that seems to be what the Fed is doing, while the BoE appears to shun the idea. Why?As a central disclaimer, nobody actually agrees on how QE works, let alone its scary sibling “quantitative tightening”. But it does seem at least theoretically possible that central banks could use QT to do so some cooling through reverse “wealth effects”.While no central bank has enough evidence to actually outline the likelihood of this sequence of events, the Fed hasn’t been shy in articulating a role for its balance sheet in bringing price pressures back to earth. Take this statement from Fed vice chair Lael Brainard in April: The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections. I expect the combined effect of rate increases and balance sheet reduction to bring the stance of policy to a more neutral position later this year, with the full extent of additional tightening over time dependent on how the outlook for inflation and employment evolves.Nobody from the BoE has said something remotely similar, instead, officials there have delivered a series of confusing and somewhat contradictory statements about how the balance sheet fits into its overall monetary policy strategy. Deutsche Bank economist Sanjay Raja pointed out to FT Alphaville that the BoE has gone out of its way to downplay the impact of its own nascent version of QT. Its August 2021 monetary policy report explicitly stated that while the intention of QE was to impact market expectations of rate paths (a reminder of the long-lost world of “lower for longer”) QT would not have the opposite effect: First, increasing the target stock of purchased assets may have provided a signal about the MPC’s aim to loosen the overall stance of policy in the past, depressing the expected path of Bank Rate. In contrast, the MPC would not intend to use its decisions about the process of reducing the stock of purchased assets to signal a need for a higher path for Bank Rate.This, according to Raja, was an effort to “remove a lot of the tightening element” that comes with eventual unwinding. Why is the Fed so much keener to big up the balance sheet as a policy tool than the BoE? One reason could be the totally different maturity profile of their balance sheets. The Fed’s portfolio is fluid enough to allow a ‘run off’ on different bandwidths depending on the pace with which it wishes to tighten. The BoE doesn’t have this option. According to FTAV’s calculations, about 20 per cent of Treasuries on the Fed’s books are due to mature next year, and 58 per cent within the next five. That gives it ample room to adjust the extent to which it withdraws liquidity from the market. Along the same time horizons, only 29 per cent of the BoE’s gilts are due to come off its books.

This means that the only way for balance sheet shrinkage to be an active policy tool for the BoE is through out-and-out bond sales. This process would have to be explicitly designed, rather than just adjusting the pace of an already booked-in taper. The complexity of designing such a program may at least partially explain why the BoE is behind the Fed according to James Smith, an economist at ING:When the BoE set out their plan for QT in August 2021, they made clear that active sales would be considered when they reached a 1 per cent bank rate. There’s no way that, at that time, the bank would’ve expected to get there within a year. In short, they may just need time to work through the operational aspects of selling.This interpretation certainly fits with the MPC’s actions last Thursday: tasking bank staff to go away and actually come up with a plan for selling gilts. We shouldn’t discount relatively compelling technical explanations for the behaviour of central banks. But it would be remiss of us not to point out an alternative, infinitely more interesting argument that puts varying levels of QT-hesitancy down to something else altogether — different levels of confidence as to what it will actually do. The Fed has been here before. Some economists therefore think Powell and co may just have enough experience to judge how much reduced liquidity markets can handle without becoming distressed. The BoE, on the other hand, has zero experience with QT. This makes the risk-reward profile of its own great unwinding more uncertain. Jo Michell, an economics professor at UWE Bristol, pointed FTAV towards the harsh truth that the Bank “can’t tolerate” financial markets breaking down via a botched effort at QT. On the other hand, it can pass the responsibility for any rate increase-triggered rise in unemployment to the Treasury. As interest rates climb, there is nothing stopping fiscal support being delivered to households, pointed out Michell. But would Rishi Sunak be keen to step in here and offer additional assistance? We’re doubtful.Given the uncertainty as to how the markets would react to out-and-out sales — and the BoE’s mandate to protect both price and financial stability — perhaps QT hesitancy is the correct call. Our best guess, though, is that if there’s no help from the government, ignoring the usefulness of balance sheet shrinkage as a means to help control inflation might end badly for the BoE. More

Dear reader, To twist an adage, when China sneezes the rest of the world’s manufacturers catch a cold. That more than ever applies to electric vehicle maker Tesla.The extent of disruptions to Tesla’s production at its Shanghai factory has caught the attention of its investors. Covid-19 lockdowns in the city, now in their sixth week, have reduced output and caused logistics woes for Tesla. But things look much worse for its global peers, which rely on petrol cars for most of their earnings.China matters to Tesla, and its chief executive Elon Musk touched on this in his interview at the FT’s Future of the Car summit on Tuesday. The electric car maker achieved a new sales record in China last year, with its turnover there swelling to almost half of its US sales. As a result of the lockdowns, which included China’s largest auto manufacturing hubs of Shanghai and Jilin province, car sales in China have tumbled. In April, total sales fell 36 per cent, the most in two years (during the pandemic), to 1mn autos.Tesla suffered badly, shipping just 1,500 cars from its Shanghai plant in April, according to China Passenger Car Association data. Normally, about 66,000 cars leave this plant each month. Moreover, production at Tesla’s factory in Shanghai has also grown in importance to global supply.The China plant, Tesla’s first outside the US, had initially produced vehicles for the domestic market. But earlier this year, about 36,000 cars made there were exported to other parts of Asia and Europe each month. Any disruption at its China plants means an increasingly bigger problem for the global supply of these electric cars. The hit to Tesla’s China sales should be shortlived, once lockdowns ease, which Musk also pointed out. But the same cannot be said for other companies that have been hit with wider, more lasting disruptions. Toyota this week announced another round of production suspensions starting next week, which would affect the output of about 40,000 vehicles. Volkswagen, which also has plants in China, has already struggled with temporary shutdowns at some plants in Europe.Even once lockdowns in China do ease and production schedules normalise, the prolonged closure of key auto parts makers elsewhere means a shortage of components threatens automakers’ output for the medium term. On top of a continuing chip shortage, low-tech parts such as wire harnesses, which are used to bundle and organise cables within cars, are in critically short supply as Ukrainian makers of these remain closed. This is where Tesla has an advantage. Electric cars have far fewer parts, with about 20 moving parts in an electric engine. Compare that with up to 1,000 components for internal combustion engines. Automakers such as Toyota — late to the shift to battery electric cars — are most vulnerable to the latest shortage. Any resulting price rise on automotive parts thus hurts. Toyota warned on Wednesday of an “unprecedented” jump in raw material prices, as it expects its materials costs to more than double to ¥1.45tn ($11bn) in the year to next March. Toyota says such an increase could slash a fifth off its full-year profit. That piles on more misery for shareholders. The Japanese automaker also reported a sharp decline in operating profit for the quarter to March that was well below analyst expectations. The latest round of suspensions, which affect a larger number of production lines and factories than previously expected, suggest any hopes that global disruptions might ease soon have been misplaced. Enjoy the rest of your week.June YoonLex writer More